Post date: 21/09/2020 13:13

While the Federal Reserve’s September meeting had been the focus of last week, the FOMC didn’t surprise investors and the market impact was muted. The modest rally in most emerging market currencies last week likely had more to do with positive economic news, particularly out of China, and the absence of any major negative headlines regarding the pandemic. The rallies witnessed in risk currencies have, however, reversed so far this morning amid news that authorities in Europe are considering the reimposition of restrictions designed to halt the second wave of infections witnessed across the continent. Aside from the news on the reintroduction of virus containment measures, the most important economic data releases this week will be the PMIs of business activity. It is true that the pandemic disruption has made these harder to interpret, so markets will also be paying close attention to the negotiations on additional stimulus in the UK and a Brexit agreement in the UK.


Boris Johnson’s partial retreat on the issue of breaching the Withdrawal Agreement with the EU, by allowing Parliament to have final say in the matter, did much to stabilize sentiment in Sterling and send the currency higher for the week against most of its major peers. The Bank of England, meanwhile, did not cut rates but implied that negative rates remain a possibility. The vote on the bank’s QE programme was also unanimous in favour of no change, although we think that this remains likely to be increased at the MPC’s November meeting. The September “flash” PMIs of business activity will be the most important economic data release out this week. That being said, the main focus will likely be on the UK government, which is expected to discuss the imposition of fresh virus restriction measures. There has been speculation that this could even include a second national lockdown.


The worsening COVID numbers out of the Eurozone were highlighted in a dramatic fashion by the partial reimposition of lockdown measures in the worst affected parts of Madrid. The second wave of the pandemic failed to have a significant impact on the Euro last week, possibly because it seems so far less deathly and it hasn’t had a meaningful impact on the economic recovery. We are, however, witnessing a relatively sharp move lower in the common currency so far this morning – down over half a percent at the time of writing. This, we believe, is a result of investors fearing a new raft of virus restriction measures being imposed in a handful of European countries, notably Spain, France and the Netherlands. News of further restrictive measures could present a bit of a downside risk to the common currency this week.


The FOMC did not surprise markets last week. Most Fed members expect to keep rates at zero through the end of 2023. The reaction from markets seemed to imply that expectations may have been for an even more dovish message somehow, as equities struggled somewhat in the aftermath. Meanwhile, high-frequency labour market indicators such as weekly claims for unemployment insurance continue to outperform expectations. We believe that we are likely to get some bipartisan compromise on additional fiscal stimulus soon, which in the context of still stretched short dollar positioning among speculators may provide short term support for the greenback.