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Interest rate decision and mini budget

It is a shortened week for the UK given the Bank Holiday on Monday which ends the mourning period for the UK. Sterling remains fragile given the state of the economy and has a big week ahead of it which could provide further directional movement.  Economic data and key events dominate the second half of the week. The BoE’s September policy update was originally planned for last Thursday but was delayed by a week because of the Queen’s funeral. The Bank of England is keeping the market guessing on how much they could raise by and are also in the position where they know there will be additional measures such as capping energy bills to help with the cost of living crisis. Of key interest will be the BoE’s initial thoughts on the implications for monetary policy following the government’s announcement of measures to cushion the impact of rising energy prices. These will mean that inflation is likely to peak well below where the BoE’s envisaged at the time of its last update in August; however, some members have opening expressed that this could embed inflation more. Currently the market is showing a circa 70% probability of a 75 basis point and a 30% probability of a 50 basis point hike. The previous voting pattern on the MPC wasn’t unanimous, and this time may again see a split. Speculation beforehand is that one Monetary Policy Committee member may again vote for a smaller 25bp rise, but that others may favour a larger 75bp hike this time. On Friday, a mini Budget to deliver tax cuts promised by Liz Truss during her Tory leadership campaign will take place. The new PM has vowed to cut taxes to boost the economy and help people with rising living costs. New Chancellor Kwasi Kwarteng is also likely to set out the estimated cost of plans to cap energy prices.

Finally, in terms of economic data, the market will be focused on the PMI services and manufacturing data. It is expected that both the service and manufacturing sectors are going to reporting contraction, the focus will be how fast the slowdown is and what that means for the predicted recession.

Markets expect US Federal Reserve to announce a third consecutive rate hike

The highlight event last week reported that US inflation rates fell less than expected in August, sending financial markets lower as investors brace themselves for further aggressive policy action from the Federal Reserve. US Treasury yields have continued to move higher, with the 2-year US yield having picked up to around 3.95%, the highest since 2007 and signaling that financial markets currently expect US interest rates to move to around the 4% mark.

It is a light week on the US economic calendar. The limited schedule of releases will elevate the importance of the September Federal Reserve rate decision as the is the stand-out event on the calendar among any major currency over the coming days. Recent hawkish comments form Chair Powell before the central bank went into its blackout period and when considering last week’s CPI inflation data, market participants appear to be convinced that a move of at least 75-basis points is a near certainty, while bets are increasing of a possible 100-basis point hike. Notably, this week’s September meeting is one of the meetings where Fed policymakers update their forecasts, including the ‘dot plot’ of interest rate projections.

This week’s US economic calendar will provide updated data releases including existing home sales data on Wednesday and monthly PMI Manufacturing and Services data towards the end of this week.

War between Russia and Ukraine continues to impact EU economy

Economic data has taken a back seat of late (apart from inflation) as the impact of the ongoing war between the Russia and Ukraine continues to impact the wider economy. ECB President Lagarde was speaking yesterday and stated that the region will not let the phase of high inflation feed into economic behaviour and create a lasting inflation problem. She went on to imply that if evidence arises that high inflation risk de-anchoring inflation expectations, the policy rate that is compatible with our target would lie in restrictive territory.

The single currency will be susceptible to the relative currency movements from the UK and US over the next 48 hours as both of there central banks will be hosting their respective monetary policy meetings. On Friday, the market will be focused on the PMI services and manufacturing data. It is expected that both the service and manufacturing sectors are going to reporting contraction.

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