ACM Update 22-09-25
Amidst a slowing US jobs market, the Federal Reserve made their first move of 2025 in cutting interest rates by 0.25%. The path for the remainder of the year suggests more cuts to come, possibly in both remaining policy meetings. The Dollar gained ground though due to a less dovish stance than markets had been expecting.
On the Bank of England side, it looks to be more “keep calm and carry on cutting”. Andrew Bailey and his MPC colleagues kept UK rates on hold, reiterating their cautious and gradual approach.
This week features a range of speeches from both Bank of England and Federal Reserve policymakers, as well as Q2’s Final US GDP reading. The Fed’s chosen inflation reading of Core PCE inflation arrives on Friday.
Donald Trump finally got his wish last week, with the first US interest rate cut of his second term. Whilst the President was enjoying an historic second state visit to the UK, featuring a banquet at Windsor Castle, the Fed opted for a 0.25% reduction in policy. But their reasoning was more due to the recent slowdown in the US jobs market than having inflation under control.
Whilst the rate cut was expected, a slightly more dovish tone was delivered, leading to Dollar strength during the latter half of the week. Some market analysts had feared a 0.50% rate reduction however the smaller cut was favoured 11-1. Only Trump’s latest appointee and White House employee, Stephen Miran, wanted the larger cut. Arguably, precisely what he was added to the Fed committee to promote.
The ongoing path for the rest of the year suggests another one or most likely two rate cuts to come from the remaining meetings, in October and December. Lower figures than of late on weekly unemployment claims also allayed some fears in the jobs market, when they were released on Thursday lunchtime. This and the softer Fed stance saw the Dollar gain around 1.5% between the Fed meeting and the close of markets on Friday.
In other Fed news, Lisa Cook was present at the policy decision last week. A Federal Court confirmed that Trump cannot remove her from her post, amidst mortgage fraud allegations. Trump has now gone to the Supreme Court for a ruling, despite evidence emerging of no wrongdoing on Cook’s part.
Elsewhere, retail sales rose for their third month in a row, adding to evidence that Americans are still spending (at least for now) despite tariff costs increasing some prices. The figure was up 0.6% month on month for August. US industrial production however is still feeling the weight of trade policies, barely making any gains in the same month.
Sterling-Dollar saw a volatile week, which was hardly unsurprising given interest rate announcements on both sides of the Atlantic. The almost 2% weekly range on the pair can be seen in the chart below:
It was also the Bank of England’s turn for an interest rate decision last week. Thursday lunchtime saw the “cautious and gradual” mantra from the Bank continue, dubbed by markets as “keep calm and carry on cutting”. Andrew Bailey and Co’s decision was widely expected, but the committee remained cautious with regards to when their next cut will come.
The Monetary Policy Committee announced a reduction in the rate of which it sells Government bonds held, suggesting a change of tactic. This comes after the recent turmoil in financial markets, caused by a lack of confidence in the Government.
Another major UK release was the August inflation reading, remaining at 3.8%. However, within that data food price inflation rose for the fifth consecutive month, with the fastest rise since the beginning of 2024. Many economists are putting this down to supermarkets passing on April’s National Insurance hikes to consumers. On the other side of the scale, air fare price rises slowed as is often the case July to August, keeping inflation constant overall.
UK retail sales continued to rise though in the same month, with a further 0.5% growth, fractionally beating forecasts. Unemployment data showed little sign for optimism however, with the headline rate remaining at 4.7%. Average earnings (wage growth) also recorded the same figure of 4.7%. This should mean under the Government’s “triple lock” policy that the state pension will rise by 4.7% next year.
The most damaging news for the Pound last week came through on Friday morning. The latest Government Borrowing figures showed a difference between public income and expenditure of £18 billion in August. This was £3.5bn more than the same month last year, over £5bn worse than forecasts and the highest August reading in five years.
Confidence in Rachel Reeves continues to diminish, whilst the chances of tax hikes in November are on the up. The Public Sector Net Borrowing data saw GBP-EUR move to its lowest level in over six weeks come the close on Friday, breaking below the 1.15 level.
In the Eurozone, instability in France remains burdensome for the single currency. With rising debt, the merry-go-round of Prime Ministers are having trouble in seeking a path forwards. Added to this, previous budget proposals led to a general strike last week, as well as widespread protests as a result. At the current pace, by the end of the decade the cost of servicing French debt alone is expected to be close to €100 billion a year. President Macron has 18 months left of his second term.
Away from the French protests, Italian news has been slightly better. The credit ratings agency Fitch moved to upgrade their rating to BBB+ over the weekend. This comes as a result of their recent fiscal austerity plans. The move was praised by PM Giorgia Meloni as a “sign of confidence” from financial markets.
There were a couple of speeches from ECB President Lagarde, which contained little substance on the currency market front. EU CPI inflation was revised downwards, meaning August stands bang on target at 2.0%. This is now the third month in a row with European inflation on track, allowing Lagarde & Co to focus on generating economic growth.
On the confidence side, the most recent EU ZEW figures were released for both Germany and the EU as a whole. Both showed a reading higher than forecast and an improvement on the previous month. Industrial production meanwhile grew marginally after a drop the previous month.
The drop in Sterling-Euro last week can be seen in the chart below:
The week ahead:
Monday – BoE Pill & Fed Williams speeches (14:45), EU Consumer Confidence (15:00), ECB Nagel, Fed Miran & Fed Barkin speeches (17:00), BoE Bailey speech (19:00)
Tuesday – EU/UK/US Manufacturing & Services PMIs (08:15-14:45), BoE Pill speech (10:00), Fed Bowman speech (14:00), Fed Powell speech (17:35)
Wednesday – German IFO Business Climate (09:00), BoE Greene speech (17:30)
Thursday – Swiss National Bank rate announcement (08:30), US Final GDP, Durable Goods Orders & Unemployment Claims (13:30)
Friday – Canada GDP (13:30), US Core PCE inflation (13:30)
After last week’s central bank meetings, this week is more focussed on speeches from members of the respective committees. On the UK side, Andrew Bailey and independent MPC member, Megan Greene, are both speaking at events throughout the week. These may see them shed further light on last week’s meeting, or their own respective policy thoughts going forwards.
US events are again likely to be more relevant this week though, both on the data front and speeches from the Fed’s policymakers. The Final GDP reading for Q2 is expected to show a 3.3% quarterly gain over Q1. This is arguably much more than many would have expected when the tariff situation was kicking off back in April and can be considered a win for Trump.
We also have the latest on Core PCE inflation, which is the Fed’s preferred inflation-measuring index. However, with the Fed focus now switching to the jobs market, the inflation data will perhaps be slightly less scrutinised than it has been. The weekly jobless claims figure though (released on Thursday lunchtime) is a crucial one. The last few weeks have been inconsistent at best, so something more around the 230,000 new claims would be welcome.
Beyond that Jerome Powell holds a speech on Tuesday afternoon (UK time). Despite this being a speech at non-Federal Reserve a lunch event, any thoughts on upcoming policy will be welcomed by markets. There are also a considerable number of speeches from other Fed policymakers, scattered throughout the week.
On the European side, consumer confidence data emerges early in the week, along with the usual raft of Manufacturing and Services PMI figures. There is also the quarterly Swiss National Bank meeting on Thursday morning, expected to see policy remain at 0.00%.
Following another volatile week with 2% swings, the importance of looking after your currency exchange requirements is as pertinent as ever. Despite a US interest rate cut which ordinarily would weaken the Dollar, the currency gained considerably. Things are not always as obvious as they seem.
To discuss your upcoming FX requirements in more detail, reach out to the Aston team.
Have a great week.
