Fed Raises Rates as Bank of England Holds
Summary
The Federal Reserve raised interest rates last week for the first time in more than three years, strengthening the dollar
The Bank of England kept rates unchanged despite UK inflation rising again in August
Sterling recorded its largest weekly decline since June, even as UK retail sales came in stronger than expected
Attention now shifts to business activity data and Thursday’s meeting between US President Donald Trump and Chinese President Xi Jinping
Last week brought a clear divergence between US and UK monetary policy. The Federal Reserve unanimously raised its target rate by a quarter point, taking it to 3.75%–4.00%, and said inflation remained elevated while economic activity continued to expand at a solid pace. The dollar strengthened following the decision, with markets also increasing expectations of further tightening.
The Bank of England took a different course, leaving Bank Rate unchanged at 3.75%. The decision was split, with three of the nine policymakers preferring an immediate increase. UK inflation had risen to 3.1% in August, with transport costs providing the largest upward contribution, and the Bank said the risks to the inflation outlook had moved further to the upside. It nevertheless said there had so far been little evidence of significant second-round effects in wages and prices.
Sterling ended the week under pressure despite further evidence that consumer spending has remained resilient. Retail sales unexpectedly increased in August after falling in July, but the pound was still on course for its largest weekly decline against the dollar since June. Reuters attributed much of that move to the stronger dollar following the Federal Reserve’s rate increase and its firmer policy stance.
The euro enters the new week after the European Central Bank also raised rates earlier this month, taking its deposit rate to 2.50%. ECB Vice-President Boris Vujčić said on Friday that expectations for the future path of interest rates were being driven mainly by higher energy prices, while emphasising that the Bank continues to assess a wider range of economic data. The ECB has maintained its meeting-by-meeting approach rather than committing to a predetermined path for rates.
Energy markets remain relevant, although oil prices eased on Monday to their lowest level in more than a week. The decline followed signs of increased Saudi oil exports and expectations that disrupted pipeline capacity could return, even as the conflict with Iran continues and shipping through the Strait of Hormuz remains heavily reduced compared with pre-war levels.
With last week’s major central-bank decisions now complete, the economic calendar is lighter. Wednesday brings preliminary business activity surveys across the UK, euro area and United States. On Thursday, President Trump is scheduled to host President Xi in Washington for talks covering trade, technology and other areas of the US-China relationship. US new-home sales are also due on Thursday, followed by durable-goods orders on Friday.
Events to Watch This Week:
Tuesday 22 September: UK public sector finances for August
Wednesday 23 September: UK, euro area and US flash PMI surveys
Thursday 24 September: Trump-Xi meeting; US new-home sales
Friday 25 September: US durable-goods orders
The week begins with US rates higher, UK rates unchanged and the ECB having tightened earlier in September. The next round of business surveys and US economic data will provide the first major activity updates following those decisions.
Speak to the Orbis dealing team ahead of this week’s key events to discuss your upcoming currency requirements.
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