Weekly Brief

Currency wars

12 minute read

23 September 2022


The latest interest rate hike from the Bank of England (BoE) Yesterday (Thursday) came out as expected, with another 50bps increase, taking UK rates from 1.75 to 2.25% in the process. Whilst the BoE may have ultimately agreed with and delivered on market expectations, the voting pattern implied that there was a much more colourful discussion amongst the MPC members, given that 3 voted for a 75bps hike and 1 opted for just 25bps, suggesting that future meetings might be more difficult for the market to call.

The BoE also updated their expectations for UK inflation, with a revised peak of 11% from 13.3% previously, set to land next month, followed by several months above 10%, before inflation is then expected to decline. Interestingly enough, the newly released UK energy price guarantee is the main reason behind the BoE’s downside revisions to inflation, with the BoE suggesting that this package will now significantly limit further inflation rises.

What was perhaps most significant, is that the pound actually showed a modicum of strength in the immediate aftermath of the BoE, with GBP/USD moving from a new cycle low of 1.1211 to over 1.1300, despite the BoE ‘only’ raising rates by 50bps. The combination of a slightly less abysmal outlook on the economy from the BoE combined with the impending mini-budget from the new chancellor, may well have helped to offer support on the day.

Looking ahead, the latest growth figures for the UK will dominate next week, and the pound is likely to continue to take its cues from overall market sentiment, and how that might impact the short-term profile for the greenback.

Thoughts from the dealing desk

“GBP/USD today has hit another fresh low, the big question we are being asked by clients over the last few weeks is can GBP/USD go lower. The last time it was this low was in 1985 and in that year GBP/USD hit a low of $1.05. One of the top forecasters who are regularly in Bloomberg’s top 10 rankings is RBC Capital Markets and their current forecast show GBP/USD at 1.08 by the end of Q1 2023. So there is scope to see GBP/USD go lower. However if you look at the mean average of the forecasts submitted to Bloomberg since the start of September it shows GBP/USD recovering to $1.17 by the end of Q2 next year and $1.22 by the end of 2023.”

-Jon Camenzuli, Corporate Dealer 


There has been a bit of a data vacuum in Europe this week, leaving the single currency at the mercy of the greenback for the most part, which is dangerous in this environment. Unfortunately, the latest S&P Global PMI for the region is released shortly after we go to print this week. However, expectations are for a continued weakness, with the key Composite component expected to decline from 48.9 to around 48.2. It is likely to be a similar story for Germany, with a move from 46.9 to around 46. What we did get was the latest Consumer Confidence reading for the region, which deteriorated further to -28.8 from -25, which is perhaps to be expected given the challenging economic backdrop.

Next week is a completely different story, with the latest German retail Sales, Unemployment and region-wide HICP Inflation, which came out at 9.1% last time round, followed by overall Unemployment for the region. By Friday, we should therefore have a much clearer picture of whether there has been any further decline in economic activity.

As for the Euro, well as we said at the top, the single currency fell victim to the strong dollar throughout this week, with EUR/USD marking a new cycle low of 0.9808. However, by the close of play yesterday (Thursday), the single currency had rallied back to over 0.9850, reflecting a somewhat weaker greenback on the session. Having slipped to a 20-month low below 1.1400 earlier in the week, the pound rallied after the BoE, sending GBP/EUR back to a 1.1500 high.


Whilst the Fed may have delivered in line with market expectations when they raised US interest rates by another 75bps this week, pushing the cash rate up to a range of 3 – 3.25%, the hawkish tone from Jay Powell was really what sent risk assets lower on the day. Powell reaffirmed the Fed’s commitment to continue hiking US rates to combat inflation, even if there is a slowdown in the economy, or clearer signs of a recession emerge in the US.

The hawkish tone swiftly sent risk assets into a tailspin, with yields surging on US Treasuries. As we said prior to the meeting, markets will pay far greater attention to what the Fed says about the prospect for future rate hikes, than the actual size of the hike itself on the day, and there was a fairly swift re-assessment of future rate hikes from the market, with many analysts now expecting another 75bps rate hike from the Fed in the November meeting. If correct, that would be the 4th meeting in a row that the Fed have hiked US rates by 75bps, with those ever-expanding interest rate differentials between the US and the rest of the world a big driver towards ongoing dollar strength.

Saying that, the rest of the world seems committed to play catch-up with the Fed as soon as possible, and with the Riksbank hiking by 100bps, the Norges Bank, Bank of Canada, ECB and Swiss National Bank also hiking by 75bps over the past couple of weeks, media talk of a currency wars is now frequently emerging. However, whilst raising interest rates may historically have helped to drive your own currency higher, that task is clearly much harder if everybody else is doing the same exercise. If not currency wars, then a race to the top might be a more appropriate explanation.

Talking of wars, the BoJ attempted to put a line in the sand on yen weakness yesterday, intervening (on their own) to support the currency after USD/JPY rallied over 145.00 in the immediate aftermath of the FOMC and BoJ meetings. The move caused intense volatility and some rapid price swings, with a move from over 145 to under 141, and then back to 143 in the space of minutes. Whether the BoJ are successful with their attempts to halt the yen’s decline remains questionable, however, with the FOMC in no mood to halt US rate hikes, and the BoJ in no mood to abandon QQE, they may need to sell some more of their US Treasury reserve holdings to support the yen. Ironically, selling treasuries increases yields and higher yields historically transmit into a stronger dollar.

As for now, the king dollar remains the only game in town, with the greenback gaining an extra personal boost when markets are in a risk-off mode, which remains the overriding market sentiment for the time being. After all of the volatility this week, next week promises to be a much calmer affair, with the latest growth figures perhaps the one to watch.


The latest Canadian inflation reading this week finally showed some welcoming signs of easing, with both the headline and core prints coming out below expectations. The headline dropped from 7.6% to 7% (YoY), and the core moving from 6.1% to 5.8% (YoY). The declines emerged despite food prices rising at their fastest pace for over 40 years. The monthly fall of 0.3% on the headline also represented the fastest drop since the early COVID days.

Whilst still a country mile away from the BoC’s 2% inflation target, the sharp declines in inflation may help to encourage smaller rate hikes from the BoC going forward. That is good news, given that the BoC have already raised Canadian rates by 300bps over the past 6 months.

Today’s Retail Sales are also expected to reflect further weakness, with a decline of around 2% forecast after a 1.1% increase during July. As for the Loonie, well USD/CAD continued to accelerate beyond 1.3000, marking a top of just under 1.3550, but there was a respectable pullback to under 1.3470 by yesterday’s close. However, with little keynote Canadian economic data scheduled for next week, the Loonie will likely lean on the greenback for directional bias.


AUD/USD printed a fresh two-year low at 0.6574 yesterday, driven by that stronger greenback, with the pair clawing back around 100 pips alongside other currencies against the greenback yesterday afternoon. The latest speech from RBA deputy governor, Michele Bullock, did little to help support the flagging Aussie the day beforehand, with Bullock highlighting that Australia is in a much better position on inflation than ‘some other countries’, which could highlight a much slower hiking outlook for Australia.  Bullock also highlighted concerns around China’s economy, zero covid policy and property market. Of course, China matters to Australia, so ongoing weakness is likely to greatly impact Australian exports, which is clearly a factor underpinning Aussie weakness of late.

It was a similar picture for the Kiwi this week, with NZD/USD slipping to a 30-month low of 0.5800. On the data front, New Zealand’s trade Deficit widened to $12.2B during August, with imports growing and exports flagging. Not the best of combinations. Looking ahead, the latest Australian Retail Sales will be the one to watch next week, to see whether the recent RBA hikes have had any impact on consumer spending throughout August.


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