September 21, 2022

Daily Report 21/09/2022

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Sterling held firm in early Europe on Tuesday against the dollar, but the currency gradually lost traction during the day. The reversal of equity-market gains was a significant element sapping Sterling support, especially with a wider reversal in risk appetite as Wall Street moved into negative territory. There were further reservations over the UK economic outlook ahead of Thursday’s Bank of England policy meeting and Friday’s fiscal event. There was further unease that the Treasury would not be publishing updated economic forecasts this week, reinforcing fears over a dramatic widening in the budget deficit. In this environment, higher yields failed to support Sterling with expectations of hawkish stances from global central banks also sapping support. The UK currency dipped back towards 37-year lows while the Euro held firm.The latest reports suggested that there would be a cut in the property transaction tax to help boost activity, but Sterling was unable to make any headway on Wednesday against the dollar. The Euro traded a higher than expected budget deficit reinforcing reservations over fiscal policy.

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The Euro-Zone recorded a current account deficit of EUR20bn for July after a EUR4.0bn surplus the previous month and compared with expectations of a small surplus for the month. In the 12 months to July, the surplus declined to EUR63bn and 0.5% of GDP compared with a surplus of EUR370bn and 3.1% the previous year. The data reinforced expectations that the Euro-area basic balance of payments position had deteriorated sharply over the past few months with a surge in import costs. The Euro held firm in early Europe on Tuesday but was unable to make further headway and gradually lost ground into the New York open. Plans to hold votes on joining Russia in occupied Ukraine areas unsettled the Euro to some extent. The inability to hold parity also triggered further selling later in the session as underlying confidence in the Euro-zone outlook remained weak. Risk appetite dipped in US trading with equities moving lower which also provided an element of defensive dollar support into the European close and the Euro dipped.

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The Federal Reserve will announce its latest policy decision on Wednesday. There are strong expectations that the bank will sanction another 75 basis-point hike in rates to 3.25%. The statement, Chair Powell’s press conference and updated forecasts of interest rates from individual committee members will all be important for market sentiment with markets looking for forward guidance. Markets expect a hawkish policy stance from the Fed with Powell expected to warn that an extended period of restrictive policy would be needed. These expectations of a hawkish policy stance maintained a strong dollar tone in early Europe on Wednesday with the Euro dipping below 0.9950 after Russia’s announcement of a partial military mobilisation of forces reinforced fears over escalation in the Ukraine conflict.

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Fed Interest Rate Decision