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20th September - Weekly FX Update

Top Currency Pairs Tuesday 20th September 04:00 UTC GBP/USD: 1.14346 (Last Week: 1.16118) EUR/USD: 1.00301 (Last Week: 1.00824) GBP/EUR: 1.14003 (Last Week: 1.15170)

Market News

Pound Sterling Sterling traded much lower last week as the UK currency was quoted below 1.14 against the Dollar for the second time since 1985. UK CPI inflation was lower in August than July, reading at 9.9% year-on-year. It would have been a positive development for the Pound, suggesting a peak in price rises may have passed, but the Bank of England interest rate decision this Thursday will ultimately determine where GBP trades in September. Pressure was also heaped on after Friday's poor UK retail sales, where the ONS said a 1.6% month on month fall was recorded. This was dramatically lower than the 0.4% growth seen last month and is largely down to the recent elevated inflation and fears over a harsh winter. This week is expected to be extremely volatile for the Pound, with interest rate decisions being made by not only the Bank of England (Thursday) but by the Federal Reserve (Wednesday).

Euro The Euro rallied at the start of last week, almost reaching 1.02 against the Dollar before US inflation was released on Tuesday. ECB Vice President de Guindos commented on the exchange rates, stating that further depreciation would be "detrimental to inflationary pressures" and that "more hikes might come in the next few months". This was an echo of ECB President Lagarde's comments earlier in the week, so it looks somewhat positive for further hikes in the Eurozone. Looking at the week ahead, the Euro will take its cues from a Tuesday speech from Lagarde, Wednesdays Federal Reserve policy decision and S&P Global PMI surveys on Friday.

U.S. Dollar The Dollar regained strength last week and delayed the recovery of other G10 currencies against the greenback. Inflation released Tuesday was soft, but above the expected level. More importantly, Core CPI unexpectedly rose 0.6%, doubling expectations of a 0.3% reading. Within minutes the Dollar recorded gains of more than 1% against many major currencies. Core CPI is inflation generated domestically, meaning external variables including energy prices are not considered. This is arguably therefore inflation that can be contained by rising interest rates, and the Federal Reserve have made it abundantly clear in recent weeks that even if inflation had continued to fall, there would still be a large increase in interest rates so a 75-bps hike on Thursday is expected at the very least.

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