e have been warning for a while of market complacency about the timetable for Bank of England hikes. These concerns were fully validated last week. The MPC shifted its tone decisively, and it is increasingly likely that there will be a majority of members voting for a hike in the bank rate as soon as the next meeting in November. Sterling enjoyed its best weekly performance in many years soaring by over 3% in trade weighted terms.

Away from the Pound, firmer inflation data in the US served to firm up yields and the likelihood of a Federal Reserve hike in December and kept the Euro below the psychological level of 1.20.

This week is dominated by central bank meetings. Of course, the key event is the Federal Reserve meeting on Wednesday, but the Bank of Japan, Norges Bank, Bank of Indonesia and South African Reserve Board are also going to be in focus.

Major currencies in detail

GBP

The clear hawkish tilt in the MPC meeting on Thursday was confirmed by a speech from member Vlieghe, who stated on Friday that the evolution of recent data suggested that “we are approaching the moment when the Bank rate may need to rise”. He was one of the more dovish members, and his hawkish turn is very significant. It is highly likely that there will be at least five members voting for a hike in November, thereby delivering the first hike in rates in ten years.

Sterling soared on the news. We would note that the market is pricing in about a 60% chance of a hike in November. We believe that as that number rises to 100% and an eventual hike takes place, there is a further room for the Pound to rally, particularly against the Euro.

EUR

The only important news last week out of the Eurozone was an industrial production report that came out as expected, showing steady growth in the European manufacturing sector of 3.2% annualised. The quiet week had Euro trading off developments elsewhere, trying to break through the 1.20 level against the Dollar and failing to do so after stronger than expected inflation data out of the US.

This week should be no different. The only news of note comes out on Friday morning with the release of the PMI business activity indices in the Eurozone. Much more important for the medium term trend of the Euro will be the communications from the Federal Reserve on Wednesday night. Should the “dot plot” continue to indicate gradual but steady hikes over the next two years, the Euro could find itself under pressure towards the end of the week.

USD

Mixed data out of the US ended up leaving the Dollar roughly where it had began the week. Stronger than expected August inflation on Thursday reminded markets that a December hike is still very much in the cards. However, a decidedly weak retail sales print on Friday knocked the Dollar back down to where it had started the week. It is unclear the extent to which this weakness is due to hurricane Harvey’s disruption in Texas.

This week’s Federal Reserve meeting is critical, as always. No move in rates is expected by markets, and the key will be to ascertain whether Fed officials take heart from last week’s rebound in inflation and keep open the option of a December hike.