Central Banks Draw the Battle Lines as Dollar Regains Momentum
Key Highlights
- Federal Reserve raises rates: The Fed increased the federal funds target range by 25bps to 3.75%–4.00%, with the decision unanimous. The move and continued focus on elevated inflation helped drive renewed demand for the US dollar.
- Bank of England holds, but with a hawkish tilt: The BoE kept Bank Rate at 3.75%, although three of the nine MPC members voted for an immediate 25bp increase. The Bank also warned that risks to the inflation outlook have moved further to the upside.
- UK inflation moves higher: Headline CPI increased to 3.1% in August, compared with 2.9% previously, with higher energy and transport costs contributing to the increase.
- Dollar strengthens: The dollar reached its strongest level in more than seven weeks following the Fed decision, putting pressure on both sterling and the euro.
- Sterling remains under pressure: GBP/USD traded around the 1.34 area during the latter part of last week as the combination of a stronger dollar and the BoE’s decision to hold rates weighed on the pair.
- PMIs take centre stage this week: Wednesday’s preliminary September PMI readings across the Eurozone, UK and US should provide the clearest indication of how businesses are coping with higher energy prices and tighter monetary conditions.
Market Recap
Last week was dominated by central-bank decisions, with the Federal Reserve, Bank of England and Bank of Japan all in focus.
The Fed raised interest rates by 25bps to 3.75%–4.00%, citing still-elevated inflation alongside resilient domestic spending and robust investment. The decision strengthened the dollar, which climbed to a seven-week high and pushed EUR/USD back towards the mid-1.14s.
Sterling also came under pressure. UK inflation rose to 3.1%, but the BoE opted to leave rates unchanged at 3.75%. Importantly, the vote was 6–3, with three policymakers preferring an immediate increase to 4%, highlighting growing concern over inflation risks from elevated energy prices.
There was some better news for the UK economy on Friday, with retail sales rising 0.5% month-on-month, against expectations for a decline.
Overall, however, the week belonged to the dollar, as higher US rates and continuing geopolitical uncertainty increased demand for the currency.
Our Thoughts for the Week Ahead
Following a particularly busy week for central banks, attention now shifts towards economic data and, importantly, how policymakers interpret the latest inflation picture.
Wednesday looks to be the week’s key session, with French, German, Eurozone, UK and US flash PMIs all due. Markets will be watching closely for evidence that higher energy prices are beginning to feed through into business costs while simultaneously weighing on economic activity.
For sterling, the balance remains finely poised. The BoE’s 6–3 vote demonstrated a clear shift towards tighter policy, which could provide some underlying support to GBP. However, concerns surrounding UK growth and government finances remain potential headwinds.
For the dollar, the Fed’s rate increase has restored some momentum. A resilient set of US PMIs, jobless claims or durable-goods figures could reinforce expectations that rates remain higher for longer.
We therefore expect GBP/USD and EUR/USD to remain particularly sensitive to relative interest-rate expectations, while geopolitical developments and energy prices remain an important wildcard.
Economic Calendar
Monday
12:00PM EU German Bundesbank Monthly Report
12:30PM US FOMC Member Goolsbee Speaks
5:00PM EU ECB President Lagarde Speaks
Tuesday
8:00AM UK Public Sector Net Borrowing
10:30AM EU German Bundesbank President Nagel Speaks
12:00PM UK CBI Industrial Order Expectations
1:00PM EU ECB President Lagarde Speaks
2:15PM US ADP Weekly Employment Change
4:00PM EU Eurozone Consumer Confidence
4:05PM US FOMC Member Williams Speaks
4:20PM US FOMC Member Jefferson Speaks
7:00PM US FOMC Member Barkin Speaks
Wednesday
9:15AM EU French Flash Manufacturing & Services PMI
9:30AM EU German Flash Manufacturing & Services PMI
10:00AM EU Eurozone Flash Manufacturing & Services PMI
10:30AM UK UK Flash Manufacturing & Services PMI
3:45PM US US Flash Manufacturing & Services PMI
4:05PM US FOMC Member Barr Speaks
4:30PM US US Crude Oil Inventories
Thursday
10:00AM EU ECB Economic Bulletin
10:00AM EU German Ifo Business Climate
10:10AM US FOMC Member Williams Speaks
11:30AM UK MPC Member Dhingra Speaks
2:30PM US Initial Jobless Claims
2:30PM US US Current Account
2:50PM US FOMC Member Hammack Speaks
3:30PM UK MPC Member Breeden Speaks
4:00PM UK MPC Member Lombardelli Speaks
4:00PM US US New Home Sales
Friday
1:01AM UK GfK Consumer Confidence
8:00AM EU German GfK Consumer Climate
10:00AM EU Eurozone M3 Money Supply
10:00AM EU Eurozone Private Loans
11:15AM UK BoE Governor Bailey Speaks
11:15AM US FOMC Member Williams Speaks
2:30PM US Core Durable Goods Orders
2:30PM US Durable Goods Orders
4:00PM US University of Michigan Consumer Sentiment – Final
4:00PM US University of Michigan Inflation Expectations
8:00PM US FOMC Member Hammack Speaks