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Bailey pulls the plug, could slide through the sinkhole?

At the halfway point of the week, confidence in the sterling is declining. The decline started last evening following some comments from the BoE Governor regarding the recent GILT purchases made. The Bank of England backstopped the long-dated gilt market by buying up gilts, which kept their yields lower. Last night Gov Bailey stated, “The rebalancing must be done and my message to the funds involved and all the firms involved managing those funds: you’ve got three days left now. You’ve got to get this done.”

Elements of the market expected the programme to be extended until the next fiscal event at the end of the month. However, the messaging seems firm. It will be interesting to see if this prompts any action from the government, which will meet for the Prime Minister’s Question for the first time since the mini-budget and Labour’s record lead in the poll.

This morning the UK GDP released, showing that the UK economy unexpectedly shrank in August for the first time in two months, according to official data. The surprise 0.3% drop reinforces the Bank of England’s prediction that the UK will fall into recession this year.

Economic data is quiet for the UK in the coming days, but the market will watch the GILTS situation, which could impact sterling.

The Greenback makes gains on UK and EZ woes, data-focused in the second half of the week

Economic data from the US was light in the early part of the week with much of the focus in the second half. The US dollar made gains against both GBP and the EUR. The progress against sterling was based on the UK financial systems’ fragility following last night’s comments from BoE Gov Bailey. In the meantime, gains against the single currency were due to intensified military action between Ukraine and Russia. Russia launched a high number of missiles at cities across Ukraine. Although many were intercepted, there were still a large number of strikes, with markets uneasy over the threat of further escalation.

Looking at the remainder of the week, there will be a lot of focus on the FOMC minutes and the economic data from the region. Today sees the release of the FOMC minutes; these will be deciphered for clues on policy action moving forward. Headline consumer inflation will release on Thursday. Headline CPI inflation fell back in the past two months, led by lower energy prices, but it remained high at 8.3% in August; will this trend continue? Consumer data in retail sales and the University of Michigan consumer sentiment survey will release on Friday.

Military escalation sends the Euro lower

The single currency was under pressure following intensified military action between Ukraine and Russia. The Euro-Zone Sentix investor confidence index dipped further to -38.3 for October from -31.8, weaker than consensus forecasts of -34.7 and the lowest reading since May 2020. However, the latest data on gas storage levels in Europe was more encouraging, with mild weather allowing a further increase, lessening immediate fears surrounding this winter.

Looking to the remainder of the week ahead, it is a relatively quiet week regarding meaningful data. The ongoing situation in Ukraine always means there is a risk of increased volatility. As always, the market will keep a close on the rhetoric of key ECB officials, including President Christine Lagarde, who is speaks today.

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