Yesterday evening the US federal reserve raised interest rates by 75 basis points. Raising the policy rate from 2.5% to 3.25%.
This is the third 75 basis point hike in as many meetings by the Fed, highlighting again their intention to take a strong stance on inflation levels that have spiralled out of control. “The committee is strongly committed to returning inflation to its 2% objective,” the Fed said in a statement. Markets now expect US interest rates to finish the year above 4%. For context they began the year at 0.25%.
The cable rate (GBPUSD) fell by a cent immediately, following the Fed’s announcement to a new 37-year low of 1.1235. The pound did stage an initial fightback; however, we open the day trading in the lower 1.12s, having hit a new low of 1.1211. £100,000 now buys $6000 less vs a month ago. Will we see cable test the 1.10 handle in the coming weeks?
The dollar strengthened against every other major currency during yesterday’s session but what does this mean for the pound? Although cable fell, GBPEUR gained close to half a percent, presenting a window of opportunity for euro buyers. Although the pound gained value against the euro. This was not driven by positive news coming from the UK and perhaps was driven by the euro’s weakness against the dollar.
USDEUR is the most traded currency pair globally and the euro lost more than 1.25% against the dollar during the day. The pairing climbed close to 1.02 following the fed, 20-year highs for the dollar.
Other than the increase against the euro, the pound lost value against a number of major currencies. GBPAUD is trading close to 5-year lows, with GBPCHF trading at 48-year lows and GBPCAD at 12-year lows. GBP sellers will be hoping the Bank of England lends support to the pounds value which is now one of the worst performing major currencies in 2022.
As mentioned in my article last week, the Bank of England will announce at midday today whether interest rates are going up by 50 basis points or 75 basis points. With a recession looming, the bank will not want their decision to cause the UK economy to cool off too quickly.
The market shows a 70% probability of a 75 basis point hike and a 30% probability of a 50 basis point hike. It is expected that the 9 members of the MPC (monetary policy committee) may have differing views and be split on whether to raise rates by 25, 50 or 75 basis points.
GBP sellers will be hoping for a bullish 75 basis point hike which could lend support to the pounds value. However, with the energy crisis expecting to continue into the winter months, some commentators believe the Bank can only limit the damage caused to the pound.
GBPEUR opens the day slightly softer, GBPCHF dropped by than half a percent this morning in anticipation of the SNB’s (Swiss National Bank) interest rate announcement. As expected, they have raised interest rates by 75 basis points, bringing their policy rate up from -0.25% to 0.5%. The SNB next meet in December, some commentators were expecting a supersized 100 basis point hike today and so the pound has clawed back all of the ground lost against the Swissie in the last 24 hours.
If you lave a large currency exchange coming up and you would like to discuss the markets in more detail, feel free to contact me on [email protected] and I will be more than happy to have a chat with you.
