The Morning Update

The USD slips, oil prices fall, equity markets are up, and US yields are steady ahead of the Federal Reserve interest rate decision. Currency markets remain on hold, while oil prices fall as they await the Fed's rate decision. Equity markets strengthened after British inflation slowed unexpectedly, and put the Bank of England rate hike pause back on the table. US Treasuries were steady after yields on both 5 & 10-year notes hit the highest levels since 2007 on Tuesday. The focus will be on Fed Chair Powell who is widely expected to pause interest rate hikes while maintaining a hawkish tone, with the prospect of one more hike in 2023. Investors will be focused on the Fed's updated quarterly rate projections which will be released at the conclusion of the policy meeting.

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In other news. Global debt pile hits record high of $307tn-FT. Surprise UK inflation fall raises prospect of BoE rate hike pause. Ford avoids Canada walkout as UAW prepares for more US auto strikes. The EU to ask China at the UN to push Russia towards 'just peace' in Ukraine. Australia tribunal to rule Chevron LNG strikes after talks fail. In France, Le Pen's RN party pays back Eur 6 mn Russian loan. Trudeau and Modi rift deepens after claim over Sikh murder-FT. Biden urges world leaders to stop Ukraine from being 'carved up'. Goldman Sachs raised its forecast for crude back to triple digits as world demand grows and OPEC+ supply curbs continue to tighten the market.

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In currency news. GBP tests its weakest level since May after inflation data suggests the BoE may pause interest rate hike on Thursday. The USD holds steady heading into today's Fed interest rate decision. Speculation increases that the BoJ may intervene as the JPY edges towards 150 vs. USD. CNY holds steady, while Asian currencies firm by 0.1% on average vs. USD. Trading currencies are mostly positive with just JPY down 0.1%, while CHF & ZAR are up 0.1%, MXN firms 0.2%, AUD, NOK & NZD strengthened 0.3%, and SEK rallied 0.65% vs. USD.

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In commodity news. Oil prices fall 1%, Gold is flat, Silver and Copper gain 0.45%, Lumber is unchanged, and Wheat strengthens 1.65%

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CAD slipped from its 6-week high of 1.3383 on Tuesday as markets steady heading into the Federal Reserve interest rate decision. The loonie has been steadily gaining ground as oil prices continued to advance through $95 and then received an extra boost after CAD annual inflation jumped to 4% from 3.3% in July which prompted speculation that the BoC may need to raise interest rates at its next meeting. Money markets see about a 40% chance that the BoC will hike in October, up from 23% prior to the inflation data on Tuesday. Today all focus will be on the Fed's interest rate decision and statement to provide intraday direction to currency markets.

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EURCAD edges off September lows as oil prices weaken in early trading, but month to date the CAD has gained almost 2% and is holding at near 3-month highs vs. the Euro.

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EUR continues to stall around the 1.0700 level as investors await the Fed. The Euro appears sidelined ahead of the Fed's rate decision, but with speculation that the ECB is done hiking domestic interest rates, it appears more difficult for the Euro to gain any positive traction vs. USD. Focus today will be on the Fed and its statement. If Chairman Powell maintains his current hawkish tone, with the suggestion of a further rate hike in 2023 we expect we could see further weakness in the single currency. A break of 1.0635 leaves the Euro vulnerable to further weakness towards 1.0450.

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GBPEUR fell after the surprise cooling of inflation levels in the UK. The pound tested a fresh 4-week low vs. the Euro and has now weakened over 1% month-to-date.

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GBP tests four-month lows after softer UK CPI levels. The UK annual CPI inflation level declined to 6.7% in August compared with expectations of 7.1%, and the news put immediate pressure on the pound. According to Reuters, the probability of the BoE holding its interest rates steady on Thursday increased to 50% after the UK inflation news, up considerably from 20% earlier in the week. The pound came under selling pressure after the UK inflation news, it slumped to its lowest levels since May and investors speculate that if the BoE kept rates on hold the pound could tumble towards 1.2020, last seen in March 2023. Intraday all focus will be on the Fed to help provide intraday direction.