Fed to be last hawk? Over to you, BoE

Market reports
Thanim Islam
  • Hawkish hold as expected by Fed
  • Markets expect dovish BoE... will it stick to the script?


GBP weakened throughout the day following those lower-than-expected inflation numbers, which caused markets to scale back expectations of a rate hike today. Both Goldman Sachs and Nomura believe that we are already at the peak of interest rates in the UK, and thus see no rate hike today. Currently markets put a 50/50 chance of a rate hike today. Trading on USD was interesting, with markets selling the currency ahead of the Fed meeting, possibility down to some profit taking and repositioning.


Market rates

* Daily move - against G10 rates at 7:30am, 22.09.23

** Indicative rates - interbank rates at 7:30am, 22.09.23

Data points


  • None today.

Our thoughts

The Fed did as expected with a hawkish hold on interest rates, and a clear message that interest rates will stay higher for longer. 12 of the 19 Fed members expect to raise rates once more this year, and in the revised dot plot suggest that interest rates will be at 5.1% by the end of 2024 - that’s an uplift of 50bps from the previous forecasts. Growth projections were raised from 1% to 2.1% this year from 1.1% to 1.5% in to 2024, and the unemployment rate projections were revised lower to 3.8% this year and 4.1% this year. The message is clear from the Fed, that they can generate a soft land (no recession) whilst at the same guide inflation towards their 2% target. The USD is marginally stronger as a result, but the outlooks from the Fed does suggest that USD strength is here to stay, and markets will likely be in a risk-off mood.

All eyes on the BoE today and whether they either hike one final time by 0.25%, OR skip a hike with openness to hike in November. GBP has been weakening going into the meeting already, and should the BoE meeting be considered dovish then in the longer term we would expect further weakness on the currency. Given the expectation is for a dovish tone, anything less than dovish could well cause GBP to climb higher, but this will likely be short-term given the end of hiking interest rates and lower growth expectations.

Chart of the day

Since the crash on the GBP following last year's disastrous mini-budget, the currency went on a 10-month winning streak gaining by 15% to its peak in July. The main reason behind this was the Bank of England’s actions in raising interest rates to levels not seen since 2008. But, with the supporting act of higher interest rates set to bow out, focus in the FX space seems likely to fall on growth differentials. July's numbers showed a bigger contraction, and should this continue then this will likely be negative for GBP as well. On Friday we have September’s PMIs which will give us a taste of economic activity this month, as well as expected growth for Q3.

Source: Bloomberg Finance L.P.

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