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This Week: Fed in focus for next USD move

This week will feature central bank meetings galore, including those of Turkey, Brazil, Japan, Norway, the UK and of course the U.S.

In light of these major central bank meetings occurring within the span of 48 hours, the middle of this week is set to be one big rollercoaster ride of volatility and price action:

Monday, September 19

  • Japan markets closed
  • UK markets closed for funeral of Queen Elizabeth II

 

Tuesday, September 20

  • JPY: Japan August CPI
  • CNH: China loan prime rates
  • AUD: RBA September meeting minutes
  • CAD: Canada August CPI

 

Wednesday, September 21

  • USD: Fed rate decision
  • US crude: EIA weekly oil inventory report

 

Thursday, September 22

  • NZD: New Zealand 3Q consumer confidence, August external trade
  • JPY: Bank of Japan policy decision
  • NOK: Central Bank of Norway rate decision
  • GBP: Bank of England rate decision
  • USD: US weekly initial jobless claims
  • EUR: Eurozone September consumer confidence

 

Friday, September 23

  • AUD: Australia September PMIs
  • EUR: Eurozone September PMIs
  • GBP: UK September PMIs and consumer confidence
  • CAD: Canada July retail sales

 

The FOMC meeting certainly stands out as the Fed is expected to carry on hiking rates.

At the time of writing, markets have fully priced in a third-successive 75bps hike. There’s even a non-negligible 22% chance being accorded for a 100bps hike – with such a move not seen since 1989!

Such an enormous move appears warranted after last week’s blockbuster US inflation data for August.

The higher-than-expected 8.3% year-on-year print, while marking two consecutive months of easing headline CPI figures since June’s 9.1%, still points to stubbornly elevated inflation in the world’s largest economy.

And that’s despite the Fed having already triggered 225 basis points in hikes since March, with the upper bound of the Fed target rate to 2.5% in the lead up to this week’s pivotal decision.

Critical for assessing what happens after this meeting will be the FOMC’s updated forecasts and the Fed funds rate in 2023 and 2024. If policymakers are relatively upbeat, the current peak in the terminal rate for Fed funds may head towards 5%, well above the 4.3% peak that’s currently the market forecast.

This would certainly give a bid to the dollar, with the equally-weighted USD index firmly in a uptrend, having posted a series of higher highs and higher lows since mid-2021.

This Week: Fed in focus for next USD move

A more cautious message highlighting medium-term risks to growth and emphasizing the central bank’s data dependency plus meeting-by-meeting approach would slow the dollar’s ascent and could underpin support for stocks markets.

But it does seem like the Fed is no mood to slow down and tap the brakes on its hiking path.

 

Hawkish BOE may offer brief support for ailing Sterling

The re-arranged Bank of England meeting takes place on Thursday ahead of a currency which is sinking rapidly.

GPB/USD traded below 1.14 for the first time since 1985 last Friday, and continues to languish below that psychologically-important mark today.

Hawkish BOE may offer brief support for ailing Sterling

Markets are currently torn between the chances of a 50-basis point and 75-basis point rate hike.

A key question is how policymakers will view the government’s recently announced energy support package and whether it raises inflation in the medium-term given it reduces recession risks.

This would likely require more BoE rate hikes which means sterling could find a semblance of support, though there seem to be few redeeming features about sterling at the moment.

 

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