Everything You Need To Know For The Week Ahead: Central Banks Again

At the tail end of a week where FX markets were dominated by the ECB, those dealing in Sterling and US Dollars should probably brace for more central bank talk. 

With Sterling having staged a riposte against the G10 basket Friday, the British currency goes forward into a week where its fortunes will be dictated largely by inflation data and the Bank of England, which is set to unveil its latest policy decision on Thursday, 17 September.

“We think that the vote will be split 7-2 in favour of leaving policy unchanged in September.... However, on balance, the risk appears to be that September’s minutes strike a more hawkish tone than markets are anticipating,” says Paul Hollingsworth, an economist at Capital Economics.

Hollingsworth wrote Thursday that a renewed fall in the Pound-to-Euro exchange rate, and its consequent impact on inflation, could act as a trigger for BoE hawkishness. Although the addition of a new centrist member to the Monetary Policy Committee should keep the vote stacked firmly in favour of the status quo.

The latest round of inflation figures are due out of the UK Tuesday at 09:30 London time, two days ahead of the BoE meeting, while average earnings numbers for the quarter to the end of July are due at 09:30 Wednesday.

“We see the pound being supported by the fact that the UK economy is proving much more resilient to the Brexit uncertainty that many assume. A February 2018 rate hike looks plausible to us which will prove more important for the pound than the unpredictable ebb and flow of Brexit speculation,” wrote Derek Halpenny, European head of global markets research at MUFG, in a Friday note.

The debate around BoE monetary policy met with another bend in the road during the first week of September, with economists at Berenberg and MUFG pointing toward a possible rate hike during the months ahead, while a strategist at UBS is actively betting on a rate cut.

“It seems to me that it’s been a long time since the pound was last among the top three global currencies in a weekly wrap... sterling has finally seen some short-covering and the rest of G10FX has rallied too,” says Kit Juckes, a strategist at Societe Generale.

The Pound-to-US-Dollar rate rose 0.77% Friday to trade at 1.3205 while the Pound-to-Euro rate gained 0.65% to 1.0965.

Beyond the Bank of England, Pound Sterling exchange rates will also be heavily influenced by events in the US and Australasia, while the European calendar falls relatively quiet in the wake of Thursday’s ECB meeting.

Wednesday afternoon sees the latest round of producer price inflation numbers released in the US, followed by key consumer price data on the Thursday, both of which are critical to expectations around Federal Reserve monetary policy through the rest of the year.

“The Fed’s blackout period ahead of the FOMC meeting on 20 September begins next week and three of the voting FOMC members took the opportunity this week to express concerns about inflation, as it continues to run below the 2% target,” says Mikael Olai Milhøj, an analyst at Danske Bank. “While the Fed will most likely announce “quantitative tightening” at the upcoming meeting, the dovish speeches support our view that it is not a given the Fed will hike again in December.”

In short, the Pound-to-Dollar rates’ fortunes hang largely in the balance between two sets of inflation numbers, both of which could have a meaningful impact on monetary policies on their respective side of the Atlantic.

Further out, in the Antipodes and Asia, the Pound-to-Australian-Dollar rate will be partly influenced by the latest pulse taken from the Australian Labour market, with the unemployment rate and jobless count both due at 02:30 London time Thursday.

Meanwhile, global risk appetites could also be influenced by the latest round of industrial production and fixed asset investment data due from China, also due Thursday, at 03:00 London time.