An important week ahead for investors with the US Federal Reserve deciding on the first interest rate cut since March 2020. Along with the US colleagues, Bank of England (BoE) and Bank of Japan (BoJ) monetary policy members will come together next week to vote on where to set the key interest rates. However, all three central banks are in different positions. While the US potential interest rate cut would be the first one since the COVID-19 crisis, the BoE started loosening its monetary policy in August. The BoJ, on the other hand, has only recently started to tighten monetary policy, ending its era of negative rates since 2016. Meanwhile, major Asian markets will be closed for half a week to celebrate national holidays.
Table of contents:
- UK Consumer Price Index (CPI) YoY (August)
- Euro Area Consumer Price Index (CPI) YoY (August)
- Fed Interest Rate Decision
- UK Interest Rate Decision
- Japan Interest Rate Decision
Wednesday 18.09. 08:00 CET, UK Consumer Price Index (CPI) YoY (August)
In July 2024, the annual inflation rate in the UK increased slightly to 2.2 per cent from 2 per cent in June, although it remained below the anticipated rate of 2.3 per cent. There was a more significant rise in costs for housing and household services (3.7 per cent compared to 2.3 per cent), as the decline in gas (-22.8 per cent from -37.5 per cent) and electricity prices (-19.5 per cent from -21 per cent) was less severe than in the prior month. Additionally, prices for clothing and footwear saw a greater increase (2.1 per cent from 1.6 per cent), along with communication services (4.5 per cent from 2.9 per cent) and various goods and services (3.5 per cent from 2.9 per cent).
Meanwhile, inflation remained unchanged for food and non-alcoholic beverages (1.5 per cent) and education (4.5 per cent). Service inflation slowed to 5.2 per cent, marking the lowest rate since June 2022 and falling short of the Bank of England's forecast of 5.6 per cent. Prices for restaurants and hotels (4.9 per cent compared to 6.2 per cent) primarily reflected increases in hotel costs. In comparison, prices for recreation and culture rose (3.7 per cent from 3.9 per cent) along with transportation costs (0.2 per cent compared to 0.9 per cent), influenced mainly by maintenance and repairs (5.7 per cent from 8 per cent), passenger air transport (-10.4 per cent from -0.9 per cent), and motor fuels.
The core inflation rate decreased to 3.3 per cent, down from 3.5 per cent and below the expected 3.4 per cent. The Consumer Price Index (CPI) declined by 0.2 per cent compared to June.
Analysts expect the UK's inflation rate to remain unchanged at 2.2 per cent from the previous month's reading.
Source: Tradingeconomics.com
A higher-than-expected reading may have a bearish effect on the GBP, while a lower-than-expected reading could be bullish for the GBP.
Impact: USD/GBP, EUR/GBP
Wednesday 18.09. 11:00 CET, Euro Area Consumer Price Index (CPI) YoY (August)
Initial estimates show that the annual inflation rate in the Euro Area dipped to 2.2 per cent in August 2024, down from 2.6 per cent in the previous month, in line with market expectations and representing the smallest increase in consumer prices since July 2021. This decline marked a shift from several months of persistent inflation above the 2.5 per cent level, suggesting a move towards the European Central Bank's (ECB) target of 2 per cent and creating a favourable environment for adjustments in interest rates by the central bank. The slowdown was primarily driven by a significant drop in energy prices, with base effects contributing to a decrease of -3 per cent in August compared to a rise of 1.2 per cent in July, while inflation for non-energy industrial goods also slowed to 0.4 per cent from 0.7 per cent. Conversely, inflation for services increased to 4.2 per cent from 4 per cent, and prices for food, alcohol, and tobacco rose to 2.4 per cent from 2.3 per cent. When excluding energy and unprocessed food, price growth remained steady at 2.8 per cent. On a monthly basis, the Harmonised Index of Consumer Prices (HICP) in the Euro Area rose by 0.2 per cent in August.
Analysts' expectations align with the initial estimates of the 2.2 per cent inflation rate in the Euro Area in August.
Source: Tradingeconomics.com
A higher-than-expected reading may have a bearish effect on the EUR, while a lower-than-expected reading could be bullish for the EUR.
Impact: EUR/USD, EUR/GBP, EUR/PLN
Wednesday 18.09. 20:00 CET, Fed Interest Rate Decision
During his address at the Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell indicated that the central bank is likely to reduce interest rates in the upcoming September meeting. He pointed out that the US labour market is cooling rapidly, following the weaker jobs report from July and the recent downward revision of payroll figures. Powell also mentioned that the Federal Open Market Committee (FOMC) has become increasingly confident that inflation is trending towards the central bank's 2 per cent target, suggesting that it is an appropriate time to shift monetary policy toward less restrictive measures. This statement came after the release of minutes from the Federal Reserve's previous meeting, which revealed that most policymakers concur that lowering the federal funds rate this quarter would be suitable.
Analysts expect the Fed funds interest rate to be lowered to 5.00 per cent in the upcoming meeting.
Source: Tradingeconomics.com
A decision on a higher-than-expected interest rate may have a bullish effect on the USD, while a decision on a lower-than-expected interest rate could be bearish for the USD.
Impact: EUR/USD, USD/GBP, USD/PLN
Thursday 19.09. 13:00 CET, UK Interest Rate Decision
In its August meeting, the Bank of England reduced its Bank Rate by 25 basis points to 5 per cent, which was a move anticipated by a small majority of market participants. However, the Bank indicated it will proceed cautiously with any further easing of monetary policy until there is greater confidence that inflation will remain under control. This rate cut marks a decrease from the 16-year high at which the rate had been held for the past year. The decision was described as "finely balanced," with four members of the Monetary Policy Council choosing to keep borrowing costs unchanged. This choice reflected concerns that while UK inflation has slowed, rising service prices and potential second-round effects could undermine the progress made by the central bank. Nevertheless, the Committee remained confident that headline inflation would fall and that inflation expectations would move closer to target. The MPC also noted that restrictive policy is needed to slow GDP growth to below potential and to ease labour market conditions further, justifying a more accommodative policy stance.
Analysts expect the UK interest rate to stay unchanged at 5.00 per cent in the upcoming meeting.
Source: Tradingeconomics.com
A decision on a higher-than-expected interest rate may have a bullish effect on the GBP, while a decision on a lower-than-expected interest rate could be bearish for the GBP.
Impact: EUR/GBP, USD/GBP, GBP/PLN
Friday 20.09. 05:00 CET, Japan Interest Rate Decision
In its July 2024 meeting, the BoJ increased its key short-term interest rate to around 0.25 per cent, up from the previous 0 to 0.1 per cent established in March. The central bank also announced plans to reduce its monthly bond purchases to 3 trillion JPY between January and March 2026, down from the current 6 trillion JPY, as part of a move towards more conventional monetary policy. Starting in August, the BoJ will offer to buy 400 billion JPY of 5- and 10-year Japanese government bonds (JGBs) in each operation, eliminating the previous range of 400-550 billion JPY. These adjustments are aimed at decreasing the BoJ's nearly 5 trillion USD balance sheet and gradually withdrawing from the bond market. In its quarterly outlook, the BoJ revised its core inflation forecast for the fiscal year 2024 to about 2.5 per cent, down from the April estimate of 2.8 per cent. Inflation is expected to be around 2 per cent for fiscal years 2025 and 2026. The bank also reduced its GDP growth forecast for 2024 to 0.6 per cent from 0.8 per cent due to a statistical revision while maintaining its 1.0 per cent growth outlook for fiscal years 2025 and 2026.
Analysts expect Japan's interest rate to stay unchanged at 0.25 per cent in the upcoming meeting.
Source: Tradingeconomics.com
A decision on a higher-than-expected interest rate may have a bullish effect on the JPY, while a decision on a lower-than-expected interest rate could be bearish for the JPY.
Impact: EUR/JPY, USD/JPY, GBP/JPY
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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