Rate decisions keep the dollar in control
The past week was dominated by three major central bank decisions. First, the Fed, where the FOMC hiked by 25bps for the first time since Kevin Warsh took charge. We are inclined to see Wednesday’s tightening as a fine-tuning operation, though we are far from certain that this is a one-and-done scenario. Given Chair Warsh’s comments, and more hawkish SEPs, we doubt the economic picture will look all that much improved come the October meeting. As such, we are revising our Fed call, adding a rate increase next month to our baseline, before an extended pause. Second, the BoE, which held rates on Thursday, to minimal surprise, although a hawkish tweak in guidance means we see growing risk of a rate increase before year-end. And finally, the BoJ, which hiked rates Friday. But as expected, tighter policy was accompanied by guidance that disappointed market expectations. The net result is a stronger dollar on the week, a modestly weaker pound, and a yen that has now largely given up its early September gains.
The week ahead is likely to follow a similar pattern, with a triple-header of European central banks delivering rate decisions Thursday morning. The Norges Bank, Riksbank, and SNB are all on deck, though all are likely to leave policy untouched. Monetary policy moves aside, the week also plays host to Australian employment data for August, and flash September PMIs. Still, we think the backdrop favours the dollar again on balance, as quarter-end draws closer, despite the somewhat lighter US data calendar.
You can read the Week Ahead in full here:
Authors:
Nick Rees, Head of Macro Research
Barry van der Laan, Senior FX Market Strategist
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