UK interest rates. Time to rise ?

While the status quo will remain in Europe, where the European Central Bank continues to maintain an expansive monetary policy, on other side of the Atlantic the Fed is foreseeing a tightening of its monetary policy will come more quickly than expected. Coupled with less satisfactory economic figures in Europe, the euro is still weighed down against the dollar as it trades at $1.1550, the lowest level since July 2020. US employment figures for September were the focal point for the past week. It was the last report before the next FOMC meeting and they were to shed some light on the timing for the tapering of the bond purchase programme. Per Fed Chair Jerome Powell, a better job market is a decisive factor to starting the process. While the figures that came in below economists’ expectations were disappointing, the fundamental view of the market remains unchanged.  Although 500,000 new jobs were expected, the actual figure was only 194,000.  An upward revision of the previous month’s figured did mitigate the disappointment somewhat. Unemployment has fallen from 5.2% to 4.8% as hourly wages continue to rise. This confidence in the US economy and expectations of a change of course was reflected in Treasury (10-year) note yields which rose above the 1.60% mark on Friday. With a yield spread that could increase in favour of the dollar, and therefore a better return than that of the main other currencies such as the euro, the yen, the pound sterling or the Swiss franc, the greenback should remain in demand this fall.

The euro has also weakened against the pound sterling and especially the franc, forcing the Swiss National Bank to be active on the market. It is estimated that during September the SNB intervened with CHF 21 billion worth of foreign currency purchases to counter the appreciation of the Swiss currency. The evolution of the EUR/CHF parity which is trying to break through the CHF 1.0700 bar and which is regularly pushed back supports the thesis of an actively present SNB. These interventions, which have happened for many years, are not without consequences for the bank’s balance sheet. It now amounts to 140% of GDP, compared to 70% of GDP for the ECB and 37% for the Fed.

An improved job market in the United Kingdom plus statements by Michael Saunders and Governor Andrew Bailey are forcing the market to take into account an early rate hike. First off, the two MPC members are recognized as hawks. Also, the concerns shown by Mr Bailey about rising inflation – 3.2% on an annual basis in August against 2% the previous month – and an improved job market mean a rate hike by the Bank of England imminent. It is clear from the statements of Governor Bailey, who forecasts inflation at 4% for next year and considers a failure to prevent such inflation from becoming permanent would “obviously be very damaging”. For analysts, it does not matter now whether the hike comes year or early next year – they are more concerned about its magnitude.

On the currency market, the yen plunged against the greenback once again to move above ¥113 to the dollar, the lowest since the end of 2018. Rising energy prices and the rising yields of US Treasuries weighed on the Japanese currency. The Turkish lira is another currency under pressure against the dollar, but here the situation is more serious. Weakened by the central bank’s decision to lower its rates, the Turkish currency sits at an all-time low against the greenback and has passed the threshold of 9 lire to the dollar.