Fed to remain on hold today

Sterling is a bit softer this morning following some weaker than expected UK inflation data and is trading at just under $1.235 to the dollar and at 86.5p to the euro. The dollar is mostly unchanged this morning against the single currency ahead of the Fed’s latest interest rate decision later today, and is trading at a little under $1.07.

In government bond markets, German and US 10-year yields nudged a little higher yesterday to 2.74% and 4.35% respectively. While UK yields closed slightly lower yesterday, they have fallen about 10bps on the open this morning to around 4.25% currently.

The annual rate of headline CPI inflation in the UK decelerated to 6.7% in August from 6.8% in July (when a pick-up to 7.0% was the consensus forecast), according to this morning’s ONS data, while core inflation (which excludes energy and food prices) fell as well to 6.2% from 6.9%. Services inflation, which the Bank of England (BoE) is watching particularly closely, also dipped, down to 6.8%, from 7.4%. While this data was a bit softer than expected, last week’s labour market data showed wage inflation remaining very elevated, so the MPC are still likely to go ahead with another 25bps BoE interest rate hike tomorrow.

The OECD has published updated economic forecasts, noting that the impact of tighter central bank monetary policy is becoming “increasingly visible” and projecting global GDP growth of 3% in 2023 (a touch higher than forecast in June) and 2.7% in 2024 (a touch lower than in June).

The OECD expects annual GDP growth in the US to average 2.2% this year, much the same as in 2022, slowing to 1.3% in 2024, while Euro area growth is projected to ease to 0.6% this year, from 3.5% last year, before edging up to 1.1% in 2024. Growth in the UK, meanwhile, is forecast to average 0.3% and 0.8% in 2023 and 2024 respectively.

The final reading for Euro area headline CPI inflation in August was revised down a touch to 5.2% from 5.3% in the flash estimate, but core inflation was unrevised at 5.3% (after 5.5% in July).

The Fed is likely to leave its key  interest rate unchanged at 5.25%-5.5% when it concludes its monetary policy meeting today, while it is quiet on the data front with Euro area construction output the only release of note.


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