FX Markets Monthly Outlook – October 2018

September was marked by central bank meetings alongside renewed trade war tariffs that don’t seem to decrease. The Federal Reserve Bank hiked interest rates at its meeting in the last week of September. This was widely anticipated.

The Norges bank also hiked interest rates, joining most of its counterparts. However, questions remain on whether Norges bank will be able to shift to a tightening cycle. The central bank had trimmed down the economic forecasts after all.

Swedish Riksbank was also seen preparing the markets for a rate hike. Meanwhile, the Swiss National Bank held its monetary policy meeting in September. No changes were made, and it is evident that the SNB would prefer to wait for the ECB to make the first step.

In the currency markets, the emerging market currencies were seen stabilizing. However, they continue to remain weak amid higher interest rates.

The month ahead: October 2018

Economic data for October is broadly limited to some preliminary reports. The third quarter GDP reports will be coming out. This will give investors time to assess how the various economies performed. It would also give investors an idea of what to expect as far as monetary policy response is concerned.

Politics will also likely play a significant role this month. The U.S. mid-term elections are due in November, and the U.S. and China trade war is likely to calm.

Brexit will also continue to remain in the headlines as the deadline of March 2019 fast approaches.

Here’s a quick overview of some of the critical line up of events for the month ahead.

U.S. China trade war rhetoric to continue

The U.S. led trade war rhetoric against China is quite likely to continue into the months ahead. Last month, there were moments when tensions escalated with the Trump administration threatening China with more tariffs on China-made goods.

China was also quick to respond with retaliatory tariffs. However, the tone of the narrative has sobered down since then. Latest news reports indicate that the U.S. administration might be looking for ways to reach a compromise with China. This is important because of the U.S. mid-term elections that are due to be held in November. With the mid-term elections just around the corner, it is quite likely that it would be in President Trump’s best interest to cool the trade war rhetoric.

Both the administrations are expected to meet sometime to assess the situation and to reach a compromise. This is quite likely to happen in October. So far, reports suggest that China is well aware of the U.S. demands.

China had added $60 billion of U.S. products to its import tariffs list. This was in response to the duties that the U.S. hikes on over $200 billion of goods imported from China. These tariffs went into effect during the last week of September.

Still, despite the ongoing struggle, October could very well see at least a temporary stalling of the verbal rhetoric.

Expect more Brexit headlines

Activity on the Brexit side of things was seen picking up steam last month. This trend is expected to continue into October. The British pound was seen vulnerable to Brexit related news last month.

The ongoing negotiations have so far been futile with both the UK and the EU stuck at an impasse. The UK is expected to leave the European Union in March 2019. As the clock ticks closer and a lot of issues yet to be ironed out, the British pound is likely to remain volatile.

Amid the ongoing geopolitical struggle, the economic data will also play a crucial role. With the economic data covering the activity for September, investors will get an early glimpse into how the UK’s economy performed in the third quarter of the year.

Any positive news is likely to be short-lived as investors focus on the long-term result of Brexit. The IMF had recently warned that a no-deal Brexit could potentially lead to a weaker pace of GDP growth for the UK.

There is no Bank of England monetary policy meeting scheduled this month.