The quarter ahead in currency markets

Central bank paths into year-end

Each of the major central banks meets at least twice before the end of the year, and several of those meetings come with updated economic projections. That gives markets repeated opportunities to reprice the path of interest rates, and the relative path between economies is what moves exchange rates.

We are watching less for the decisions themselves than for the signals about next year: how far each bank believes it needs to go, and how confident it is that inflation is moving sustainably towards target. A central bank that is clearly nearer the end of its cycle than its peers tends to see its currency weaken as that becomes priced in.

Growth and inflation divergence

Headline rate decisions follow the data. The monthly inflation, employment and activity releases in each major economy will shape how the market prices those decisions. The currencies most exposed are those where the market's expected path relies most on data continuing to cooperate. A surprise in either direction there can prompt a larger repricing.

Fiscal policy and budget season

The final quarter is budget season in several major economies, including the UK's autumn fiscal statement and the US federal fiscal year, which begins on 1 October. As 2022 showed for sterling, markets can react sharply when fiscal plans raise questions about credibility. We are watching borrowing projections, the reaction of government bond markets and any sign that fiscal and monetary policy are pulling in different directions.

Energy, commodities and the Gulf

Northern-hemisphere winter energy demand and OPEC+ production decisions influence the currencies of both importers and exporters. For the Gulf, oil revenues support the reserves that back the dollar pegs, while US rate decisions pass straight through to local interest rates. Gulf-based clients with sterling and euro commitments remain exposed to GBP/USD and EUR/USD, which respond to the themes above.

Year-end liquidity

Trading volumes fall in the second half of December, and banks manage their balance sheets closely around the year-end. Thinner markets can mean wider spreads and larger price moves in response to modest news. Funding markets can also behave unusually around the turn of the year, which affects the forward points used to price hedges.

What this means for clients

• Map known central bank and data dates against your own payment and receipt dates, and decide in advance how to handle exposures that fall close to them.
• Where possible, avoid executing large conversions or rolling hedges in the thin final days of December.
• Review hedging policies and hedge ratios before year-end, while markets are liquid.
• If you set annual budget exchange rates, consider locking in part of next year's requirement during the quarter rather than waiting for January.

Clients receive our full central forecasts, alternative scenarios and the risks to our view in the Quarterly Currency Outlook, together with a client briefing call.