Market Report - 21/09/2023
Fed delivers hawkish pause, City prepares for split MPC today
As of yesterday morning, investors were relatively convinced that the Bank of England would raise interest rates today, for the 15th time in a row. However, following the surprise drop in UK inflation on Wednesday, from 6.8% to 6.7%, has shaken the City, leaving traders – and businesses and households across the country – unsure what to expect from the BoE at noon today.
The money markets are currently indicating that the odds of a rate rise, or a hold, are roughly 50% each. This suggests that the MPC will have a fierce debate, and possibly a split decision at Threadneedle Street over whether to pause their hiking cycle today, or not.
Many analysts and tier 1 banks are predicting that we will see another rate hike today, taking borrowing costs to a 15-year high of 5.5%. However, Goldman Sachs yesterday predicted that the BoE will keep bank rate unchanged today, and that rates are already at their peak, after “the August inflation print surprised meaningfully to the downside.”
The surprising nature of the softer UK inflation print on Wednesday has shaken expectations for 25bps hike, which was more or less priced in leading up to todays MPC meeting. The main surprise in the dropping CPI figure being because we have seen oil prices spike over the last month, and sterling fall – which does usually hint at higher inflation.
At 6.2%, core inflation is still more than three times the Bank of England 2% inflation target.
Looking at the Fed last night, they delivered what is known as ‘a hawkish pause’ – where even though rates were left on pause, there was certainty from Chair Powell in regards to seeing at least one more interest rate hike before the end of the year.
The policy statement revealed that the Fed decided to hold rates at the 5.25%-5.50% range. Regarding the famous dot plots, they showed that 12 members of the Federal Open Market Committee (FOMC) are still seeing one more 25 basis point hike as the median projections stood at 5.6%.
Following these releases, GBP/EUR has remained relatively subdued, trading in the mid to high 1.15s, as we now await the BoE decision for fresh impetus on new levels. The Pound is always likely to fall slightly in the hours leading up to a rate hike decision, and volatility is likely in the aftermath of this meeting.
GBP/USD is consolidating losses in early Europe on Thursday, trading near a five-month low at 1.2304 set on Wednesday. The pair is weighed by the Fed's hawkish stance and increased odds of a BoE rate hike pause, following a surprise fall in UK inflation.
The EUR/USD declined sharply from weekly highs above 1.0730, falling to 1.0650 following the FOMC meeting, driven by a stronger US Dollar. The market continues to digest the outcome and the comments from Chair Powell.