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Sterling remains susceptible to political movements

Another volatile week for sterling, with price action driven by the political backdrop. UK Prime Minister Liz Truss resigned following increased pressure since the mini-budget U-turns. The Conservative Party has an accelerated process to install a new leader, which begins on Monday, with a new prime minister announced on Friday. Over the weekend, Former PM Boris Johnson withdrew from the race, despite claiming he had 102 votes from MPs. He stated, “in the course of the last days, I have sadly come to the conclusion that this would simply not be the right thing to do.” Currently, the odds are as follows Sunak 1/25, with Mordaunt at 11/1.

In the meantime, economic data did little to lift sterling. Inflation figures posted a reading of 10.1%, driven mostly by rising food prices. This is the highest reading since 1982 when inflation was 10.2%. In the year to September, food prices were up 14.5%, household services were up 20.2%, and goods inflation in total was 13.2%. Petrol prices fell, however, helping limit the rise.

Looking to the week ahead, the political backdrop is likely to be the biggest driver, with lots of questions that still need answering. These include who will be PM, who will it go to the Conservative membership, and there will be a massive Cabinet reshuffle, with the OBR forecasts still being released. Today, the flash PMI manufacturing and service sector are due for release; both are expected to show the sectors contracting. Ahead of next week’s BoE rate decision, the market will keep a close eye on rhetoric from officials.

US GDP growth set to outpace both UK and Europe

Last week was a relatively quiet week in terms of economic data for the US. The only notable releases for this week were the Empire and Philly data manufacturing. The New York Empire manufacturing survey dipped to -9.1 for October from -1.5 the previous month and below consensus forecasts of -4.0. The new orders index was unchanged with slight growth, but shipments edged lower on the month. The Philadelphia Fed Manufacturing Index data followed suit by posting a negative reading.

In the meantime, Minneapolis Fed President Kashkari stated that inflation is much too high and interest rates could quickly get to 4.5% next year. They could go higher if there is no progress on inflation. However, he added that the central bank wouldn’t need to do as much if there is help from the supply side.

Looking to the week ahead, the flash PMI manufacturing and service sector are due for release today. On Tuesday, consumer confidence is set for release, which is expected to decline slightly. However, the headline release from the US will be the advanced GDP figure which is expected to post a positive reading of over 2%.

ECB set to rise by 75 basis points 

The euro pushed higher following the German ZEW. The ZEW survey showed that German investor sentiment was less pessimistic than expected in October, even as the view of the current economic situation left little room for optimism following a tumble in confidence the month before. This was mainly due to the price stabilisation in gas prices. Yesterday, we saw gas prices slide to a 4-month low which helped push the single currency higher. It will be interesting to see if the German IFO echoes the same sentiment tomorrow.

The ECB is expected to increase all its interest rates by 75bp for a second successive policy meeting, including its deposit rate to 1.5% (from 0.75%). Financial markets are almost ‘fully priced’ for that outcome (circa 95%) and anticipate further, potentially smaller, hikes in December and next year. The market will focus on the statement and press conference. There are expected to be some technical discussions to address excessive liquidity in the banking system that emerged because of the recent unforeseen rapid rises in ECB interest rates. The press conference with President Christine Lagarde will be closely watched. She may be asked questions about the timing of quantitative tightening (QT) and what the peak rate of interest might be.Open an account

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