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Post-Covid Budget Report Forecasts Higher Growth And Inflation Rates

Sterling remained well supported yesterday following the UK Chancellor’s Autumn Budget Report. UK taxes are heading for the highest level since 1950 and the Conservative Government plans to increase public spending by £150 billion and head into the next election between 2024-25 with spending accounting for 2.5% more for the economy than in 2019-20’s. The Chancellor’s post-COVID-19 Budget Report included official forecasts showing that the economy had recovered more quickly than expected with a growth of 6.5% this year. The report included major revisions to inflation forecasts with the Office for Budget Responsibility (OBR) forecasting the Consumer Prices Index (CPI) inflation to peak at 4.4% next spring.

All eyes will turn to next week’s Bank of England Monetary Policy (BoE MPC) meeting as investors seek guidance on the Bank’s forecasted lifting of interest rates and reduction of its bond buying programme. The base rate is at a historic low of 0.1% where it has remained since the BoE made two emergency cuts at the onset of the pandemic in March 2020.

Attention Turns To Q3 GDP Data Following Weak Durable Goods Orders

On Wednesday, September’s US Durable Goods Orders (DGO) were better than expected but showed a contraction as concerns around rising inflation, supply chain issues and a slowdown in the economy continued to weigh in on risk appetite. Meanwhile, data on Wednesday also showed the US international trade deficit expanded to $96.3 billion in September.

The US 10-Year Treasury’s yields fell as investors look to the next move from the Federal Reserve (Fed) with the Dollar ending the day weaker against most major currencies. The US Dollar lost ground against the Canadian Dollar as the Bank of Canada announced it will end its weekly purchases of government bonds, the first central bank to end its pandemic related stimulus. The Bank of Japan and The European Central Bank (ECB) are expected to announce their updated plans this week. Factors such as month-end flows, portfolio rebalancing and economic growth concerns have kept investors risk appetite lower, and the Dollar remains stable.

Today, we look forward to Q3 GDP data which should offer traders further clues on the Fed’s tapering plans.

ECB Is Expected To Keep Policy Unchanged

The ECB met this morning at their October meeting to announce its decision on monetary policy. Despite growing concerns over European inflation figures, the consensus is that the Central Bank will keep the main refinancing rate unchanged at 0%. It is of note whether the ECB will hint for an extension to the Pandemic Emergency Purchase Programme (PEPP) which is currently due to end in Mach 2022. The associated press conference could provide some direction for the Euro if Christine Lagarde provides any forward guidance on future policy adjustment. She will also need to reassure markets that the ECB can handle the growing inflation concerns within the Eurozone.

Looking ahead to today, there is very little additional data of note. Therefore, all eyes will be on the ECB.

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