The pound dropped to a fresh one-month low against the dollar on Wednesday – slipping ever closer to the 1.36 level – as investors extended expectations of an interest rate hike by the Bank of England (BoE). Despite a muted dollar in early trading and the easing of the risk-off mood in markets after debt-laden Evergrande – China’s second-largest property developer – calmed nerves by saying it had resolved the payment due on a yuan-denominated bond, the pound remained in the doldrums.
Fed sets the stage for bond-buying taper and rate hike
The dollar softened slightly late on Wednesday after the Federal Reserve set its course for increasing interest rates in 2022 but left enough wriggle room to slow things down if needed.
The central bank indicated that it would start dialling back its monthly bond purchases as soon as November and signalled rate hikes could follow more quickly than expected as it pivots from pandemic crisis policies. The policy statement was accompanied by economic projections following the latest meeting of the Federal Open Market Committee (FOMC), which showed nine out of 18 officials are ready to hike rates next year in response to rising inflation.
Speaking at a news conference following the event, Fed Chair Jerome Powell said tapering of the central bank’s $120 billion in monthly bond purchases could begin after the November FOMC meeting, provided job growth in September is “reasonably strong”. The closely monitored Nonfarm Payrolls report for September will be released by the US Bureau of Labor Statistics in early October.
Investors are focusing squarely on the outcome of the BoE’s latest gathering of monetary policymakers, with the minutes from the Monetary Policy Committee’s September meeting published today. Expectations of hawkish commentary from the central bank have been replaced by speculation that an interest rate hike could be more than six months off following a flurry of downbeat data from the UK economy.
A busy day on this side of the pond sees the first significant data of the week published from the UK economy: the Markit Services and Markit Manufacturing Purchasing Managers’ Indices (PMI). This is followed by the GfK Consumer Confidence reading for September, which is released overnight.
A raft of notable data sets are scheduled for release from the US economy today: Initial Jobless Claims, Chicago Fed National Activity Index, Markit Manufacturing PMI, Markit Services PMI, and Markit PMI Composite.