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Pound slides on Brexit setback, Fed to meet on interest rates this week

Mon 24 September 2018

The week ahead:

  • US Federal Reserve interest rate decision (Wednesday, 7:00pm)
  • UK Gross Domestic Product (GDP) data (Friday, 9:30am)
  • Euro zone consumer price inflation figures (Friday, 10:00am)

Highlights from last week:

  • Sterling reverses gains as Theresa May admits impasse reached in Brexit talks
  • UK inflation unexpectedly climbs to six-month high in August
  • Bank of Japan pledges to keep interest rates very low for “an extended period”

The Week Ahead: US Federal Reserve expected to hike interest rates

Wednesday’s US central bank interest rate decision (7:00pm) will be a key event on the global economic calendar this week.

Markets have become increasingly confident that the Federal Reserve will nudge interest rates up by a further 0.25%, marking what would be a third rate rise of 2018. A combination of strong economic growth, robust employment conditions and high inflation have strengthened the case for the central bank to raise interest rates further. Investors will also be looking for clues as to the likelihood of a further rise in December and the outlook for 2019. A third estimate of the US economy’s second quarter GDP growth will follow on Thursday at 1:30pm.

A third estimate of second quarter GDP growth will headline the domestic data calendar (Friday, 9:30am) in an otherwise relatively quiet week for UK releases. The economy’s recent resilience provided some justification for the Bank of England’s decision to lift interest rates last month despite the outlook remaining clouded by Brexit uncertainties.

Euro zone business climate data (Thursday, 10:00am) and preliminary consumer price inflation figures for September (Friday, 10:00am) will provide a gauge of the euro zone’s latest economic trends.

View UK, US and euro zone announcements with our economic calendar

Other key data releases:

Bank of Japan monetary policy meeting minutes (Tuesday, 00:50am)

Reserve Bank of New Zealand interest rate decision (Wednesday, 10:00pm)

Japanese consumer price inflation data (Friday, 00:30am), unemployment data (Friday, 00:30am) and retail trade data (Friday, 00:50am)

Chinese manufacturing purchasing managers’ survey data (Friday, 2:45am)

Canadian GDP data (Friday, 1:30pm)

Last week recap – Brexit talks “impasse” a setback for sterling

Brexit-related headlines have been a key driver for sterling in recent weeks and the pound suffered sharp falls on Friday after Theresa May said negotiations with the European Union had reached an “impasse”. Sterling had started the day under renewed pressure as EU leaders warned there could be a ‘no-deal Brexit’ if the UK government fails to make concessions on the issue of trade and the future status of the Northern Irish border.

Before this latest Brexit setback, the pound had climbed to its highest level against the US dollar and euro for over a month after data showing UK inflation unexpectedly rose to 2.7% in August. This was the highest rate for six months and supported expectations that the Bank of England will gradually raise interest rates in the coming years if the UK can eventually secure a smooth exit from the EU. A surprise rise in UK retail sales last month provided further evidence of the economy’s current resilience. August’s 0.3% rise in sales followed on from a 0.9% gain in July and suggests consumer spending is on track for a solid third quarter.

A telephone conversion of £10,000 into euros through our Currency Service on Friday afternoon would have purchased €10,993.

Dollar initially slipped as Trump lifted tariffs on China

US President Trump announced $200bn of new tariffs on Chinese imports and threatened further action if China imposed retaliatory measures. The US dollar lost some ground in response to the news but the impact was lessened after China’s commerce ministry called for a more conciliatory approach to ease tensions. The US economic schedule was relatively quiet for data releases ahead of this week’s US interest rate policy meeting. Existing home sales remained steady in August after four consecutive monthly declines previously.

A telephone conversion of £10,000 via our Currency Service would have purchased US$12,907 on Friday afternoon.

Yen weakens after Bank of Japan policy meeting, sterling struggles elsewhere

The pound climbed to its highest level against the Japanese yen since mid-July last week. The yen lost some support after the Bank of Japan kept its short-term interest rate target at -0.1% and reiterated its pledge to keep interest rates extremely low for “an extended period”. A telephone conversion of £10,000 via our telephone Currency Service would have purchased JPY 1,465,193 on Wednesday morning.

Norway’s central bank lifted interest rates from 0.5% to 0.75% as was widely expected. This was the first move higher in seven years amid higher inflation and stronger economic growth. However, the Norwegian krone initially fell after the announcement as the central bank also signalled interest rates are likely to rise more slowly going forward than it had previously forecast. A telephone conversion of £10,000 via our telephone Currency Service would have purchased NOK 106,718.14 shortly after the decision on Thursday morning.

The release of the Reserve Bank of Australia’s policy meeting minutes were met by a muted response from the Australian dollar. The minutes showed policymakers saw “no strong case” for a near-term change to interest rates from 1.5%. The central bank highlighted a robust labour market and resilient household spending as positives, but cautioned that the lingering trade dispute between the US and China represented a risk to the outlook. A telephone conversion of £10,000 via our Currency Service would have purchased AUD 17,738 on Friday afternoon.

New Zealand dollar gains versus sterling were helped by data showing New Zealand’s economy grew at a faster rate than expected in the second quarter. The country’s GDP rose by 1.0% in the three months through June, double the 0.5% pace in the first quarter. A conversion of £10,000 through our telephone Currency Service would have purchased NZD 19,326 on Friday afternoon,

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