EM Market Report

Central banks in focus this week

Thanim Islam
Thanim Islam 20 September 2022

GBP: 0.5% hike expected by BoE

EUR: Energy support packages helping euro

USD: All eyes on the Fed

Sterling

Sterling was impacted by risk sentiment last week, with the currency dropping through key support levels versus the euro and the US dollar.

This week's focus falls towards the end of the week, with the Bank of England meeting on Thursday, and then Chancellor Kwasi Kwarteng’s emergency budget on Friday, detailing the energy support package. Markets are expecting interest rates to rise by 0.5% to 2.25%.

The accompanying statement by the Bank of England will be key. Given the upcoming fiscal measures, we may well see a change in the Bank's guidance for a peak in inflation, which could afford the Bank more time in it's battle with reducing inflation.

Traders this morning have priced 2% worth of interest rates hikes over Thursday's, November's, and December's meetings, implying at least two 0.75% worth of hikes.

Going into the meeting we could well see GBP recover some of last week’s losses as markets reposition themselves. But, unless we see a hawkish surprise from the BoE, then we could see another test of last week’s lows.

Euro

Price action over the last few days seems to suggest growing support for the euro. Last week we saw the euro at its strongest level versus the pound since February 2021.

Gas prices continued their recent weakness, as nations within the EU stepped up efforts to ease the energy crisis on households. Today, the Finance Minister from the Netherlands, Sigrid Kaag, is expected to announce a €16bn support package for households. The German government also announced that they have set billions of euros aside for natural gas purchases.

German producer price inflation overshot expectations this morning as well, up to 7.9%, showing the inflationary pressures being felt in the country.

This morning we have the Riksbank of Sweden interest rate decision. We’re expecting a 0.75% rate hike, but money markets are putting in a high chance of a 1% rate hike. This uber hawkish tone could set the tone and expectations for future rates hikes for the European Central Bank as well, which ultimately could add to more demand for the euro.

USD

All eyes on the Fed tomorrow evening - 0.75% is the expected interest rate hike, but as mentioned last week, markets are pricing in an outside chance of a 1% hike as well. Should the Fed only hike by 0.75% then we could see the dollar weaken slightly, given the pricing and consideration of a 1% hike. But, should the accompanying statement continue to be of a hawkish tone, then we will likely see continued support for the dollar, and it will keep up its recent strength.

Of note today will be the building permits and housing starts data for August.

Chart of the day

Central Banks are all in the spotlight this week. Rate hikes are expected from the Riksbank, the Fed, and the Bank of England, with the Bank of Japan expected to take minimal action.

Rate hikes are one thing, but the accompanying statement is as important, if not more so, to give markets guidance for future hikes.

The Riksbanks is expected to hike by 1%.
The Fed by 0.75% with a 40% chance of a 1% hike.
The BoE by 0.5% with 60% chance of a 0.75% hike.

20092022 cotdSource: Bloomberg Finance L.P.

Market rates

Today's Interbank Rates at 09:39am against sterling movement last Friday.

Euro

€1.142 ↑

US dollar

$1.143

Australian dollar

$1.706

South African rand

R20.20

Japanese yen

¥164.2

Have a great day.