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Sterling Rate Hike Expectations Diminish Following Lower Inflation

Sterling slid initially yesterday following a small decline in inflation numbers. The headline figure declined from 3.2% to 3.1% and marginally below expectations while the core rate edged lower from 3.1% to 2.9%. This in turn soured the expectation of a rate hike in November, with the probability dropping from over 60% down to circa 30%. However, Sterling recovered from these losses by the end of the day as expectations for a hike remain above 70% in December and talk of November hike is very recent.

In the meantime, concerns of a COVID-19 surge in the UK are starting to pick up momentum as new cases continue to increase. The market will watch this development closely especially as Health Secretary Sajid Javid held a press conference yesterday with a Plan B starting to be discussed. This could involve vaccine passports, mandatory masks and potentially work from home.

It is a quiet day for the UK in terms of data ahead of next week’s Budget. The latest set of public finance data showed a smaller-than-expected deficit result in September. Overnight, the GfK UK consumer confidence report for October is expected to show a further decline, following on from the unexpected drop last month. Broader concerns about energy supplies and retail prices are expected to have weighed on sentiment.

US Economy Continues To Grow At A Modest Pace

The Federal Reserve’s (Fed) Beige Book report showed that economic activity grew at a modest pace according to most Fed districts. However, several districts reported that growth had slowed having been restricted by supply chain issues and uncertainty around the Delta variant of COVID-19. Commentary within the report cited significantly elevated prices, fuelled by higher demand for goods and raw materials.

Elsewhere, yields on 10-year treasuries continued to increase, reaching 1.67% and oil prices continue to rise, holding near a seven-year high with a Saudi Arabian government official commenting that OPEC+ are powerless to impact the rising energy process.

Today traders will await the release of the weekly ‘Initial Jobless Claims’ and October’s Philadelphia Fed Manufacturing Survey. Later in the day focus will turn to September’s Existing Home Sales figures.

Is The European Central Bank (ECB) Policy Too Accommodative?

The Sterling tested new 20-month highs against the Euro yesterday buoyed on by expectations that the Bank of England (BoE) will adjust policy in November. The expectation by markets is that an early interest rate hike in November will lead to a successive series of rate hikes, with the BoE acting as the first major central bank to raise rates in the post-pandemic cycle. Conversely, investors are forecasting the ECB will keep monetary policy unchanged for too long according to a Deutsche Bank survey which suggested 46% of investors survey expected policy to remain too accommodative. The lack of a clear signal from the ECB could provide continued downside risk for the Euro.

Looking ahead at today, and it is a baron macro-economic calendar for the Eurozone. The only notable release is the Eurozone Consumer Confidence which is a leading indicator for consumer spending. It is expected that the index will have a -5 reading in October down from -4 in September demonstrating continued pessimism amongst consumers within the bloc.

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