What’s done is done, but I think the BoE (Bank of England) may regret the decision to leave interest rates on hold last week. Instead of taking the heat away from the next meeting in November, before which there will be more inflation data, it instead chose, by the barest of margins, to intensify the risks around that meeting in my opinion. 

It is fair to say that the BoE might realistically have three potential decisions to pick from at the November Monetary Policy Committee. It could hold, hike 25 basis points, or hike 50 basis points, and we won’t know which path the BoE will take until after the August average earnings and September consumer price inflation figures. So it would appear, on the surface at least, that the next monetary policy decision, and perhaps the one after that, could see the BoE chasing the data, in my view.

After last week’s data and decision, the pound suffered against the US dollar and the euro. The push in GBPUSD below $1.23, to fresh lows for over six months, was also coupled with a move to below €1.15 in GBPEUR, to levels last seen back in mid-July. The pound appears to have further headaches in store for it this week, and we could see fresh lows if the UK figures show a further slowing in consumer credit growth and an additional drop in the money supply.

We could be looking at the pound closing out the quarter at its lows versus the USD, which wouldn’t bode well for the run in to the end of the year, in my opinion. The BoE may have to consider itself in part responsible for increasing the volatility in the GBP, without materially improving the outlook for the economy.  

Also this week, the Euroland release calendar is full of interesting releases. Already on Monday we’ve had the release of German IFO* business climate index for September. That came in at 85.7, the same reading as in August. A higher reading from expectations and less of a fall in current conditions created the unchanged reading.

For the remainder of this week, the interest will switch first to Euroland M3 money supply for August, which could record an even greater contraction than that seen in July, followed by Euroland confidence indicators for September and the Euroland flash estimate for September consumer price inflation. There are some other releases from the various states that will be of interest, but the performance of the euro is likely to be mostly determined by the outcome of these releases. EURUSD appears to have found support for now in the low $1.06 region, but it is still at the bottom of recent trading ranges. If there are some downside surprises to the data releases, then the risks are for a move below $1.06 which would open the door to a move to $1.04 and then towards $1.02, in my view.

From the US, last week saw more struggles for the US housing market, and this week could be challenging as well, with the final Q2 GDP (Gross Domestic Product) figures and two sets of consumer confidence readings for September due. With the Fed having indicated that there could still be one more rate increase in the pipeline before the end of the year, the FX markets will want to see the data to support or undermine that argument be more consistent than it has been recently. There are a few important speeches from Federal Reserve officials, but I doubt we’ll learn much from those speeches that wasn’t in the Fed statement or new dot plots. If there are some further signs of weakness from the consumer confidence surveys, then the US dollar could be put under some temporary pressure, but the risks are still for some more USD gains heading into the end of the quarter, in my view.

* Information and Forschung / Germany’s Institute for Economic Research

Last week’s central bank meetings saw the surprise from the SNB (Swiss National Bank), that chose not to raise interest rates when the markets had overwhelmingly expected a 25 basis-point hike. That pushed EURCHF to a 2-month high, albeit SNB President, Thomas Jordan, warned that the central bank could still hike further. Meanwhile the other central banks didn’t deviate from market expectations, but there were some suggestions that the end is near for monetary tightening in more and more countries.

This week sees the likes of the Hungarian, Thailand, Mexican and Colombian central banks decide on interest rates. While it could be a dull affair from the latter two meetings, the first two could see divergence, with Hungary set to cut the headline rate by a full percentage point, but the Bank of Thailand set to raise interest rates 25 basis points. Could there be currency weakness in Hungary and outperformance in Thailand? Perhaps, but markets need to think more holistically about what this might mean for later into 2024. Some of the economies that are already cutting interest rates could have a sizeable head start on their economic rebounds versus those that are dragging their feet which, in my view, would offering medium term FX strength to the trailblazers on rate cuts.