EM Market Report

BoE passes on the baton to the Chancellor

Thanim Islam
Thanim Islam 23 September 2022

GBP: BoE hike by 0.5%, now for the mini-budget

EUR: September PMIs in focus

USD: Dollars sold but unlikely to be start of trend lower

Sterling

So the Bank of England hiked by 0.5% yesterday with three members voting for a 0.75% rate hike, one member for a 0.25% rate hike, and the rest voting for 0.5%. So, there are clearly some divisions within the Bank of England.

The Bank of England confirmed that the UK is likely to fall into a technical recession over the second and third quarters – but this is mostly to be caused by the extra bank holidays. However, the Bank did suggest a deep recession could well be averted as a result of Liz Truss’ energy relief plan, and did lower their forecast for peak inflation from more than 13% down to less than 11%.

Sterling weakened as a result yesterday, with focus today on the chancellors mini-budget. Chancellor Kwasi Kwarteng is expected to unleash the biggest set of tax cuts for 34 years, with the focus being on boosting growth. The key for markets today will be details on how this is will all be funded - lack of any details will no doubt cause investors to lose confidence in the UK, and we could well see sterling fall further.

This morning also sees the release of preliminary services and manufacturing PMIs for September, which could well be weaker than expected given recent events with the nation in mourning, as well as the recent bank holiday.

Euro

Very few data points out yesterday from the eurozone, but within Europe the Swiss National Bank disappointed markets with a 0.75% rate hike when markets were expecting a 1% hike. The Bank also stated that it would be willing to intervene in the markets, should they need to do so in order to stop the strength of the Swiss franc. As a result, broad selling of the Swiss franc ensued.

ECB member Kazak has been on the wires this morning, reiterating that the ECB will continue to hike interest rates for the rest of the year.

Later this morning sees the release of September PMIs.

USD

The dollar was broadly sold yesterday following the gains it made after the Fed meeting on Wednesday night. The reason? Intervention in the currency markets by the Bank of Japan. In order to support their ailing currency, the Bank sold US dollars and bought Japanese yen, causing the currency pair to drop by 4% yesterday. This in turn caused a broad sell-off on the US dollar.

The sell-off in the US dollar did ease up by the end of the day however, and going into the weekend we will likely see a consolidation of dollar moves.

Chart of the day

The Bank of Japan intervened in the currency markets for the first time since 1998 to prop up the Japanese yen. The amount of dollars sold will not be revealed until the end of the month, but the amount will likely be in the billions.

As we can see here, the actions taken by the Bank of Japan caused a broad sell off of US dollars, with the US dollar index dragged lower as well.

23092022 cotdSource: Bloomberg Finance L.P.

Market rates

Today's Interbank Rates at 08:42am against sterling movement yesterday.

Euro

€1.144

US dollar

$1.118

Australian dollar

$1.692

South African rand

R19.81

Japanese yen

¥159.0

Have a great day.