Last week delivered the central bank action markets had been building towards for months. The Federal Reserve raised interest rates for the first time since 2023, and the Bank of England held for a sixth consecutive meeting, despite a three way split on its own committee. Set alongside the European Central Bank’s two hikes earlier this year, sterling now looks like the clear laggard among the three currencies we track.
The pound slipped to multi week lows against the dollar following the decisions and lost ground against the euro too. This week’s flash PMI surveys, published Tuesday for the UK, eurozone and US, will offer an early read on how each economy enters the final stretch of the third quarter.
Fed hikes for the first time since 2023, and signals more may follow
The Federal Reserve raised its target range for the federal funds rate by a quarter point to 3.75% to 4.00% last Wednesday, its first increase since 2023 and a decisive shift after months of debate. The vote was unanimous, and updated projections showed most policymakers expect at least one more increase before the year is out, with the median forecast now sitting at 4.1% by December. Fed chair Kevin Warsh said the current stance is not clearly restrictive and declined to commit to a fixed path for further moves, keeping the door open to additional tightening if inflation data continues to run hot.
Bank of England holds, but hawkish guidance leaves sterling exposed
The Bank of England left its own rate unchanged at 3.75% on Thursday, a sixth consecutive hold, though the 6 to 3 vote split showed real division within the Monetary Policy Committee. UK inflation rose to 3.1% in August, its highest reading since March, yet the majority judged that weaker labour market conditions were already doing some of the work needed to bring inflation back down. The accompanying guidance was more hawkish than the decision itself, warning that policy may need to tighten if the Middle East conflict continues to push up energy prices and second round effects start to build.
Sterling underperforms broadly as markets look to this week’s PMI data
With the Fed hiking and the ECB having already raised rates twice this year, the Bank of England’s decision to wait has left sterling looking like the laggard among the three. GBPUSD slipped to a multi week low following the decisions, and GBPEUR also lost ground as the pound underperformed broadly. This week’s flash PMI surveys for the UK, eurozone and US, published Tuesday, will offer the first read on how each economy is entering the final stretch of the third quarter, and could help determine whether sterling’s recent slide continues or starts to stabilise.
The week ahead:
- Flash UK, eurozone and US PMI surveys (September) – 22/09 – GBPUSD, GBPEUR, EURUSD
- US durable goods orders (August) – 24/09 – GBPUSD, EURUSD
With three major central banks all making decisions inside a few days of each other, this is a good week to speak with your currency specialist about how the outcomes could affect any transfers you have coming up.
