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GBP/USD appreciated by 0.5% to 1.3284 after the Bank of England’s decision to keep the bank rate unchanged at 5%. This followed a 0.4% rise to 1.3214 the previous day, driven by the Fed’s 50 bps cut to 4.75-5.00%. The currency pair has been recovering since hitting a low of 1.23 in late April, supported by expectations that the BOE-Fed policy rate differential may turn positive by the end of the year. The BOE’s hold decision on expectations for UK inflation to rise over the remainder of the year before coming down contrasted with the Fed’s rationale to pre-empt a further cooling in the US labour market with a sizeable cut. Market pricing indicates rate cuts from both central banks at their November and December meetings, with the OIS market pricing in a cumulative 50 bps for the BOE, more than the total 75 bps for the Fed. The BOE will await the 2024 autumn Budget announcement on October 30 to assess the impact on the UK economy from the Labour government’s election pledge to restore fiscal responsibility by addressing a significant budget shortfall with potential tax increases. Until then, GBP remains the strongest currency in the DXY basket, up 4.3% YTD vs. 3.1% a week ago.
AUD/USD appreciated by 0.74% to 0.6814, fully recovering this year’s losses on bets that the Fed Funds Rate would fall towards the Reserve Bank of Australia’s cash rate target by December. We see the RBA keeping rates unchanged at 4.35% at the September 24 meeting. The futures market is 50-50 about a RBA cut at the year’s final meeting on December 10. We doubt that this week’s 50 bps Fed cut will soften RBA Governor Michele Bullock’s resolve to keep monetary policy restrictive to lower above-target inflation despite the hardships to some households and businesses. On September 5, Bullock said the RBA’s full employment goal was not served by allowing inflation to stay above target indefinitely, starkly contrasting the Fed’s stance to support the US labour market. On September 25, consensus expects CPI inflation to decline to 3.1% YoY in August from 3.5% in July. Underlying inflation, represented by the trimmed mean, was higher at 3.8% in July. According to the Statement of Monetary Policy in August, the RBA expects inflation to return to the mid-point of the 2-3% target range in late 2025. Apart from monetary policy divergence, we attribute this week’s AUD rally to the Fed’s cut fuelling risk appetite and stronger currencies in Asia, Australia’s largest export destination. AUD did not face pressures from more unwinding of yen carry trades in anticipation of a hold decision at today’s Bank of Japan meeting.
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Dhirubhai Ambani
September 20 in history
Vietnam joined the United Nations in 1977.
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