Daily Market Update

Dollar Extends Gains Before Fed Decision

September 19, 2022

The U.S. dollar remains hot, gaining against most of its major counterparts as global equities slipped. 

Overview

European equities are poised for their lowest close since July.  S&P futures show American shares will fall 1.0% at the open. Volumes are a bit muted today as both Japan and the United Kingdom are closed. There is little in the way of economic data set for release, with only the NAHB Housing Market Index on the docket.  The Federal Reserve will start its two-day meeting tomorrow.  The interest rate decision will hit the tape on Wednesday afternoon at 2 p.m. Fed Funds Futures show that traders are fully pricing in a 75-basis point hike which would bring the upper bound of rates to 3.25%.

Futures show a 22% chance that the Fed will take the much more aggressive decision to raise rates by a full percentage point.  We do not believe the Fed hike 100 basis points, but the possibility cannot be ignored.  If the Fed decides on a jumbo full percentage point hike, the greenback will all but certainly rise above recent highs versus most of its rivals.

 

What to Watch Today…

  • No major economic events are scheduled for today

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CAD ⇓

The Canadian dollar has continued its recent slide versus its American rival.  The loonie is down for a third straight day and has broken fresh two-year lows.  West Texas Intermediate slumped 2.5%, which is the likely catalyst for today’s weakness.USD/CAD is three percent higher than its low on September 13th.

 

GBP ⇓

The United Kingdom is closed today as the nation mourns the late Queen Elizabeth.  The beleaguered British pound continues to fall against the U.S. dollar.  The British pound has slumped over 3.0% over the past month, with most of the selloff coming over the past few business days. Like most major central banks, the Bank of England is between a rock and a hard place.  The British economy is floundering, but inflation is also running rampant.  Indeed, prices are rising five times faster than the Bank of England’s two percent target.  As a result, we expect the BoE to raise rates by 75 basis points on Thursday.  The hike will be its largest in over 30 years.  A 75-basis point hike is not fully priced in, with many still expecting the BoE to hike by only 50 basis points. If that were to occur, the sterling would likely fall further against the greenback.

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