Post date: 17/09/2018 10:00

Emerging market currencies finally enjoyed a strong bounce back last week. They were led by the Turkish Lira, which soared higher after its central bank hiked rates by nearly 5% to 24%, in an apparent return to sane monetary policy. This brought the Lira to outperform every other major world currency for the second week running. Lower than expected inflation readings out of the US also helped by dragging down both US bond yields and the US dollar, which ended the week down against every other currency except for Asian ones. The latter were kept on the backfoot by continued uncertainty over the outcome of the trade conflict between the US and China.

Central bank meetings will steal the spotlight this week in both G10 and emerging market countries. Most critical will be the Bank of Japan, Norges Bank, South African Reserve Board, Swiss National Bank and Banco Central do Brazil.


The Bank of England left policy unchanged last week, as universally expected. However, further positive comments from the Brexit negotiations supported Sterling. In particular. lead EU negotiator Michel Barnier suggested that an agreement was likely in the next few weeks. This confirms our view that a no-deal Brexit is an unlikely outcome and Sterling has been excessively punished in the last few weeks.

This week the focus is on inflation data out Wednesday, as the Bank of England has made it clear that further hikes are dependent on its expectations for future inflation.


As fears of a confrontation over the Italian budget recede, markets are beginning to accept that the ECB will in fact taper its purchases of sovereign bonds according to schedule, and that hikes will be forthcoming some time in the second half of next year. The ECB confirmed this outlook with somewhat hawkish communications in last week’s meeting. President Draghi struck a confident note both on growth and on the prospects for inflation to return to its target over the next few months.

We look to Friday’s flash PMI data to confirm that the economic expansion in the Eurozone remains on track, though we see no sharp moves in the EUR-USD cross rate until more clear signs emerge of an upward trend in Eurozone inflation.


The budding rally in US Treasury yields that started after the strong employment print was temporarily cut short by lower than expected inflation data. This week, data out of the US is relatively scarce, dominated by second-tier indicators like housing sales. Consequently, dollar trading will be driven primarily by headlines on the various trade conflicts and news from elsewhere.