Skip to content

Could interest rates exceed 6%, and GBPUSD hit parity?

Sterling had a torrid 72 hours following the release of the mini-budget. During the early Asian trading session on Monday, GBPUSD hit record lows as it reacted to the mini-budget and further comments over the weekend. Speculation was rife that we could see an emergency meeting BoE to raise interest rates; however, this has failed. Sterling stabilised, but remains significantly weaker than a week ago and fragile. It was reported on Bloomberg on Monday that implied volatility suggests there is a 60% probability GBPUSD spot will hit 1.00 before the end of this year.

Since then, BoE Gov. Bailey and Chief Economist Pill have spoken, highlighting that the central bank will make a full assessment at the 03 November meeting and will not hesitate to raise rates. The probability of a 125 basis point hike is 75%, with the interest rate potentially peaking in May at 6.25% based on the implied rates.

As a result of the mini-budget, YouGov stated that the Labour party rose to its largest poll lead in over two decades over the Conservative party. The report said that the opposition party is 17 points ahead of the Conservatives, a level of support not seen since 2001 when Labour’s Tony Blair was prime minister.

Moving forward, economic data for the remainder of the week is light. However, given the uncertainty, the market will continue to debate the path of interest rates, the net impact of raising rates, and the tax cuts delivered at the mini-budget.

Dollar rally continues following hawkish comments from Fed members

The US dollar extended its recent rally on expectations of further acceleration in the interest rates by the Federal Reserve (Fed). On Tuesday, the currency was further supported as St. Louis Federal Reserve President James Bullard reiterated the determination of the Fed to stare down price pressures. He commented that there is a lot of tightening in the pipeline and that the US has a serious inflation problem. His hawkish comments were supported by the other Fed members, Evans and Kashkari. These comments lifted US Treasury yields to levels not seen in decades. The 10-year note broke above 4% for the first time since 2008. 

Looking ahead to the remainder of the week, the upcoming speech from Fed Chair Jay Powell will attract investors’ attention for further clues following the recent hawkish comments from Fed policymakers regarding inflation. Market participants will look to the final release of the US Q2 GDP. The previous GDP reading was revised upwards to a contraction of 0.6% at the second reading versus an initial estimate of a 0.9% contraction. Thursday’s third and final reading of Q2 GDP is not expected to alter markets’ view of the US economy significantly. On Friday, investors will review the monthly release of consumer spending data.

European Central Bank expects a technical recession

The euro lost further ground against the dollar this week, accelerated by a deteriorating geopolitical situation in Europe, sending the pair to fresh new lows. The euro situation has been exasperated by the potential sabotage of three Russian gas pipelines. The news announced on Tuesday about the sabotage of the Nord Stream pipelines and headlines that Gazprom is expected to increase the risk of sanctions on gas supplies via Ukraine has brought the prospect of higher prices back to the forefront of investors’ minds. Focus on Wednesday will turn to European Central Bank President Christine Lagarde’s comments. Ahead of this Friday’s Eurozone flash CPI inflation figures, which will likely rise to a record high, ECB President Lagarde will participate in a keynote fireside chat. Recent comments suggest that European Central Bank expects the euro area economy to contract in the last quarter of this year and the first quarter of next year. That fits the definition of a technical recession, two consecutive quarters of negative growth.

This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at 40 Holborn Viaduct, London, EC1N 2PB. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).