Last week was probably one of the most important we have had for monetary policy in quite a while and, fortunately, the three major central-bank decisions did not deliver any major surprises.
The Federal Reserve raised interest rates by 25 basis points to 4%, its first increase since 2023, and importantly left the door open to further tightening over the coming months. The Dollar strengthened following the decision, with Kevin Warsh continuing to make it clear that inflation remains the Fed’s priority and that rates may need to remain higher if price pressures do not improve.
The Bank of England kept rates unchanged at 3.75%, although I thought the meeting was slightly more hawkish than the headline decision suggested. Three members of the MPC voted for an immediate increase to 4%, while the Bank warned that inflation could now rise above 4% in early 2027, largely because of higher energy prices. That leaves the possibility of another UK rate increase firmly on the table, even if the Bank was not prepared to act this month.
Finally, the Bank of Japan raised rates by 25 basis points to 1.25%, taking Japanese interest rates to their highest level in 31 years. Interestingly, the Yen weakened following the decision, with USD/JPY moving higher again despite the hike. That leaves Japan in a difficult position because one of the reasons for tightening policy has been the persistent weakness of the currency, yet even higher interest rates have so far failed to generate sustained Yen strength.
After three major decisions in three days, we at least have a little more certainty around monetary policy. The Fed and BoJ are tightening, while the Bank of England is holding for now but becoming increasingly concerned about inflation. The bigger unknown for markets is once again geopolitics and, in particular, what happens between the US and Iran.
There have been some more optimistic comments coming from Washington recently, with President Trump saying he hopes the conflict is moving towards an end. There have also been signs of diplomatic activity elsewhere in the region. Whether any of that ultimately results in a deal is impossible to know, but it is important for currency markets because the conflict has been one of the main reasons energy prices and inflation expectations have risen again this year.
For me, that is probably the bigger story to watch over the next few weeks. If tensions begin to ease, we could see some pressure come out of energy prices, which would make the inflation problem facing the Fed, Bank of England and ECB slightly easier. Any renewed escalation would obviously take us in the opposite direction. With the US midterm elections also approaching in November, the political backdrop is going to remain important, but there is little value in trying to predict the outcome of negotiations before anything concrete is announced.
From an economic-data perspective, this week should be considerably quieter.
There are no major releases scheduled for Monday, before Tuesday brings the latest UK public-sector borrowing figures. With the October Budget approaching, the state of the public finances is becoming increasingly relevant, particularly given the pressure higher borrowing costs are putting on government finances.
We also have the Eurozone flash consumer-confidence reading on Tuesday, alongside a number of Federal Reserve speakers. Normally the Fed speeches would attract plenty of attention, but after last week’s decision they are particularly worth following. Markets will be looking for any indication of how much support there is within the Fed for another increase before the end of the year and what policymakers would need to see from inflation and employment before acting again.
Wednesday is probably the most useful day of the week from an economic perspective, with flash PMI data from across Europe, the UK and US. These numbers give us one of the earliest indications of how businesses are performing during September and should be particularly interesting given the combination of higher energy costs and higher interest rates.
For the UK, I will be watching whether the services sector continues to hold up. We have seen some relatively resilient UK economic data recently, but the Bank of England is now dealing with the uncomfortable combination of renewed inflationary pressure and a labour market that has shown signs of weakening. A strong PMI reading would support the argument that the economy can withstand rates remaining higher for longer, while a weaker number would make the Bank’s position considerably more difficult.
The European numbers are equally interesting after the ECB’s rate increase earlier this month. One of the concerns I raised at the time was that the ECB is tightening policy because inflation has returned rather than because the European economy is particularly strong. Wednesday’s PMIs should give us a better indication of whether businesses are beginning to feel the effects of that.
The week then finishes relatively quietly, with UK GfK consumer confidence on Friday. It is not normally a major market-moving release, but it will give us another indication of how households are responding to the current environment of higher energy costs, persistent inflation and the prospect that UK interest rates may have to remain elevated for longer.
After the amount of volatility we had last week, a quieter calendar is probably not a bad thing. We now know considerably more about where the major central banks stand, and the next stage will be seeing whether the economic data justifies the decisions they have made.
For currencies, however, I think geopolitics remains the biggest wildcard. A meaningful de-escalation between the US and Iran could change the inflation outlook surprisingly quickly through lower energy prices, while another deterioration would make the job of central banks considerably harder. Until we have more clarity there, I would expect oil prices, inflation expectations and geopolitical headlines to remain just as important for FX markets as the economic calendar itself.
GBP/EUR 1.1644 GBP/USD 1.3375 GBP/AED 4.9151
GBP/AUD 1.8760 GBP/CHF 1.1004 GBP/CAD 1.8742
GBP/NZD 2.3353 EUR/USD 1.1472 GBP/ZAR 21.7324