IFX Market Report: Thursday 22nd September 2022

Yesterday the Federal Reserve of the United States decided to increase interest rates by 75 basis points, taking the base rate from 2.50% to 3.25%. Inflation is still running at its highest level since the 1980s despite signs of a slowdown in August as it decreased to 8.5%. The Fed expects unemployment to rise to 4.4% by next year and inflation to remain high until the end of 2023. The central bank board intends to continue rate hikes until an endpoint of 4.6% at the end of 2023, implying an increase by at least 125 basis points until then.

The dollar index hit a fresh 20-year high of 111.63 in the aftermath of the Fed rate hike and was last up 0.7% at 110.97. GBPUSD hit a low of 1.1239, the lowest rate on the pair since 1985. EURUSD hit its lowest rate ever at 0.9815.

The other two safe-haven currencies have also decided on their interest rates. The Bank of Japan decided to keep its interest rates at 0.10% and the Swiss National Bank voted to increase its interest rates by 75 basis points to reach 0.50%, a positive for the first time since 2015. Japan isn’t facing a big inflationary problem as it remains around 2.8% in August, however Switzerland saw its CPI reach 3.5% in a country that is usually accustomed to deflation, the highest rate since 1992.

In the United Kingdom, the Bank of England is set to announce its interest rate decision at 12pm this Thursday. Market expectations stand for 50 basis points increase following the Fed’s increase. However with growing concerns over the British economy as GDP growth is slowing down (-0.6% in Q2 compared to 1.6% in Q2) following falling retail sales (-1.6% in August), the Bank of England is considering a 75 basis points increase and could launch the biggest rate increase in 33 years. This increase could mean an extra £3.1bn in interest payments for borrowers on variable interest rates in the United Kingdom. A jump in interest payments could be the final straw for borrowers already struggling with rising costs this year as inflation still remains at 9.9% in August despite falling down slight from 10.1% in July.

Furthermore, Chancellor Kwasi Kwarteng is set to announce a “mini-budget” for the UK government on Friday to help finance Liz Truss’ plans to curb the impact of inflation on households and businesses. However, a joint report by the Institute for Fiscal Studies and Citi, warns that the plan will create a £60bn-a-year gap in public finances that risks setting the United Kingdom on an unsustainable path long term. The UK government already borrowed much more than initially expected in the past few months, as figures from August for example show that the government borrowed £11.8bn, higher than forecasted £8.8bn, leading to higher debt interest payments too of £8.2bn compared to the expect £4.9bn.

Cable saw the dollar rally ahead of yesterday's Fed announcement. GBPUSD opened at 1.1381 and closed at 1.1271.

EURUSD followed a similar trend. The pair opened at 0.9972 and closed at 0.9840 yesterday.

GBPEUR remained stable yesterday. The pair opened at 1.1414 and closed at 1.1458.

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