Weekly quick take: 31 October 2023

The view from Table Mountain, expect the Fed and Bank of England to follow the European Central Bank and keep policy unchanged.  

For the Bank of England (BoE), in line with a survey of economists carried out by Bloomberg, the most likely outcome feels like a hold for UK Base Rate at 5.25%. Given the broadly as-expected data flow since the September meeting, it is unclear what the catalyst would be for an additional hike on Thursday. With Sterling having been tracking market interest rate expectations, there may be downside risks for the currency if the policy rate is left unchanged. The overall impact on the currency may also depend on whether there are any hints about where interest rates may be heading in the future.

In my mind, this week’s Federal Reserve Open Market Committee (FOMC) meeting seems unlikely to be a game-changer for currency markets. According to a consensus forecast compiled by Bloomberg, the Fed is on course to keep rates unchanged for the second consecutive meeting. Members of the committee have spent the past several weeks fine-tuning their messaging on near-term policy. For me, the broad consensus appears to be for a wait-and-see stance this week with a tightening in financial conditions taking pressure off the Fed to actively hike the policy rate. There is little reason for the FOMC’s formal communications to deviate from that well-signalled message. The decision will only include a short FOMC statement and a Powell press conference – the meeting will not be accompanied by an updated “dot plot”, nor an updated Summary of Economic Projections.

Data in focus, will US employment data begin to cool, and will Euro area inflation continue to ease?

The key releases this week includes the US non-farm payrolls report, US Manufacturing ISM, US Job openings (Jolts) and Euro area Consumer Price Index (CPI). The continued resilience in US labour market data has been highly correlated with a “strong USD, for longer” theme which has persisted since early summer. In my view, markets will be focused on picking the point of peak US optimism and a slowdown in the US economy to signal any meaningful move higher in GBP/USD. 

For the Euro area, following another set of weak European economic data last week, the more dovish tone of the European Central Bank (ECB) last week is merited in my view, although EUR/USD appears to have found support at 1.05. Continued weakness in economic activity and downside surprises to inflation data may lead the ECB to cut interest rates earlier than expected by interest rates markets. Given GBP/EUR has been tightly correlated with interest rates over the past year, any hints that interest rate cuts from the ECB may come earlier than currently indicated by futures markets may put additional upside pressure on GBP/EUR, in my opinion.

Geopolitical tensions helping to keep the USD strong.

Events in the Middle East, particularly worries over what escalation may mean for energy prices and global investor appetite, continue to be a focus for currency markets. In the past, rising geopolitical tensions have correlated positively with a stronger USD. At times, the same has been true for the EUR given the Euro-area runs a current account surplus and money tends to flow home during times of stress. However, at the moment the EUR doesn’t appear to be finding much support.