Morning Brief – Buoyant vessels

Charles Porter
Tue 5 Sep 2023

Buoyant vessels

If loose lips sink ships, then the monetary policy institutions of the European Central Bank, Bank of England and Federal Reserve should be firmly afloat. Despite the President of the ECB speaking yesterday in London, there are still very few clues available about what lies in store for the European monetary authority’s September meeting. The meeting scheduled for next Thursday is one of the most closely watched and uncertain decisions so far in this hiking cycle. Investors are particularly focussed upon this meeting as they feel recent weak data could justify a pause in the relentless hikes of the ECB’s main policy rates. Despite the President offering the market nothing in terms of a flavour for next week’s meeting, there remain other policymakers scheduled to speak this week and next. Should any less considered comments be made about next week’s meeting, expect some potential EUR movement.

The ECB will not be alone in delivering critical decisions this month. The following week both the Federal Reserve and Bank of England will deliver their latest decisions consecutively on Wednesday and Thursday. It is worth remembering also that the market is still net long EURUSD so any suggestion that the ECB will not fulfil a potential 25-basis point hike next week could undermine the pair. On the political scene within the Euro area, a revival of the fiscal profligacy debate has occurred. Policy makers at the national and European levels have been discussing the potential reintroduction of strict budget criteria that was suspended during the pandemic. Fiscal and political instability could wreak havoc upon interest rates causing further obscurity for the remainder of the ECB’s meetings this year. 

The forthcoming meetings also mean data, particularly inflation data, will soon be published. In the UK in particular, a spike in fuel prices last month could lead to a spike in month-on-month inflation. Whilst this price rise will be within the estimates, if inflation is shown to be resurgent, it could still alter investors’ expectations moving into the BoE meeting. The implied terminal rate of interest in the UK has moderated since its recent highs. However, the longer-dated portion of the UK yield curve remains stubbornly high with little easing priced in. Standing in contrast to other economies, notably the United States, this could leave room for longer dated paper to rise in price within the UK. This in turn would undermine GBP demand and potentially see Sterling suffer further.

Discussion and Analysis by Charles Porter

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