USD rises ahead of the Fed rate decision – Daily Market Brief, September 21, 2022

USD is climbing ahead of the Federal Reserve interest rate decision. The Fed is expected to hike rates by 75 basis points, the third straight 75 bps hike. What comes next could drive the USD higher.

·         UK public sector net borrowing jumps in August to £11.09 billion, GBP/USD falls

·         USD/JPY recaptures 144.00 ahead of the Fed announcement & tomorrow’s BoJ meeting

·         Could a hawkish outlook from the Fed send Gold to fresh 2022 lows?

Stocks across Europe and on Wall Street ended sharply lower yesterday as European investors priced in aggressive interest rate hikes from central banks over the coming weeks and months.

A surprise move by Sweden’s Riksbank, which hiked rates by a full 100 basis points, ahead of the 75 basis points forecast, caught the broader market off guard and hit risk sentiment. Could the more hawkish stance be a sign of things to come this week, a massive week for central bank announcements?

The S&P500 closed 1.1% lower at 3855, a monthly low, with the weakness on Wall Street transferring to a cautious start to trading in Europe today ahead of the keenly awaited Federal Reserve interest rate decision.

UK government borrowing

Data revealed that UK public sector net borrowing jumped in August to £11.82 billion. This was ahead of the £8.45 billion forecast. These figures raise concerns over the high levels of government borrowing even before Liz Truss has started to borrow to fund her hugely expensive energy relief package and other supportive measures, which are expected to be announced on Friday’s mini-budget. Long-term UK government bonds are already under strain, with gilt yields at a decade high and the pound looking increasingly vulnerable.

Fed rate decision

The big question today is whether the Fed will raise interest rates by 75 basis points as expected or whether the Fed will take a leaf out of the Riksbank’s book and go for a 100-basis point hike. The market started pricing in a larger rate hike after US CPI data showed that headline inflation cooled by less than expected and core inflation rose more than forecast, suggesting that inflation is more embedded in the economy than previously thought. The market is pricing in a 20% probability of a 100-basis point hike.

In the case of a 75-basis point hike, this would be the third jumbo-sized hike, taking the benchmark lending rate to its highest since 2008. However, the market will likely be more interested in what comes next. Will the US central bank’s dot plot point to more aggressive rate hikes across the remainder of the year?

With the US labour market still strong, retail sales remaining resilient, and the ISM services PMI expanding, there is a good chance that further big hikes will be signalled for November and December.

USD/JPY is on the rise and trades at 144.00. A hawkish-sounding Fed could see the pair push up to the 2022 high of 145.00 and potentially beyond. The BoJ meets tomorrow and is expected to stick to its dovish stance, highlighting a widening of Fed-BoJ policy divergence.

Meanwhile, the loonie trades under pressure, with USD/CAD trading at a 2-year high of 1.3380, and GBP/USD is struggling at 1.1370 as this week could also show widening Fed – BoE policy divergence.

Gold holds steady around $1665 close to its 2022 low. A hawkish Fed could see bullion break below the 2-year low of $1654, hit on Monday, opening to door to further losses.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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