Treasury Market Commentary -

Could the base rate hit 4% next year?

A weekly economic update from our Treasury team.

Published

26th August 2022

Category

Macro Commentary

Market focus is very much on Fed chairman Powell’s keynote speech at the Jackson Hole summit today, and whether he gives any guidance on the central bank’s intentions over the coming months. Yields have pushed up to new recent highs across the curve with further aggressive monetary tightening expected.

In the UK economists have revised higher the expected peak in inflation, with the market now forecasting the Bank of England will raise interest rates above the 4% level next year, and a recession now becoming increasingly likely.

UK longer term yields are trading at their highest levels in over a decade.

The fiscal policy response from the new prime minister will be critical to economic performance over the next 12 months.

Natural gas prices have hit multi-year highs, further weighing on the economic outlook for Europe in particular. The European central bank is expected to further raise interest rates in the coming months as they remain fully focussed on bringing down inflation.

On the exchanges, dollar strength remains the key driver on its favourable economic fundamentals and safe-haven status. GBP/USD has dropped below 1.1800, its lowest level since the pandemic outbreak in 2020, whilst GBP/EUR remains very much within its 1.1750 – 1.2000 range. The Euro has fallen below the psychological 1.0000 parity level against the surging US dollar, a 20-year low.

GBP/USD – 1-year chart

Week Ahead

Date

Release

Last

Expected*

30/8/22

UK Mortgage Approvals

63.7k

n/a

1/9/22

UK S&P/CIPS Manufacturing PMI

46.0

n/a

2/9/22

US Change in Nonfarm Payrolls

528k

300k

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.1785

USD/JPY

137.05

GBP/EUR

1.1845

AUD/USD

0.6955

EUR/USD

0.9950

USD/CHF

0.9655

GBP/AED

4.3300

XAU/USD

1755

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7479

+1.29%

S&P

4199

-11.90%

EUROSTOXX

3674

-14.51%

UK Benchmark Rates

Swap Mid (SONIA)

 

2-year

+3.71%

5-year

+3.23%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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