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Sunak lifts sterling and UK sentiment

Sterling made gains across the board following the certainty that both Prime Minister Sunak and Chancellor Hunt are expected to bring to the UK economy with the fiscal plans. However, several questions remain with speculation that the fiscal statement, originally planned for Monday, 31st October, will be postponed. In addition, next week’s BoE meeting, where interest rates are due to rise, will also be watched to articulate the impact on their fiscal plans for the autumn statement due in November.

In the meantime, economic data has yet to paint a favourable picture, as the manufacturing and service sector data was negative. The manufacturing PMI reported a 29-month low, while the services sector posted a 21-month low. Bank of England Deputy Governor Ramsden stated that the UK economic data was consistent with the economy being in recession.

The only data released in the second half of the week is the CBI realised sales. More in focus will be the interactions between PM Sunak and Chancellor Hunt as they deliberate on how to plug the fiscal blackhole.

Euro makes gains ahead of ECB meeting

The euro made gains against the dollar primarily based on weak US fundamentals. The Eurozone manufacturing index declined to a 29-month low while the services-sector index declined slightly to a 20-month low, but in line with market expectations. The data reinforced unease over the Eurozone outlook and limited potential for net euro support, although lower gas prices provided some element of optimism. The week’s primary focus is the ECB meeting, due for release on Thursday.

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 will likely 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.

Weaker data hampers US dollar

Weaker data put pressure on the greenback, with the PMI manufacturing index retreating to a 28-month low. The service sector Index dipped to a two-month low and the fourth successive reading in contractionary territory. Compounding the greenback’s woes was the consumer confidence reading, which fell to 102.5 for October from a revised 107.8 previously and well below consensus forecasts of 106.5. Confidence in the labour market declined with renewed concerns over inflation trends. Confirming the downturn in the manufacturing data, the US Philly Fed non-manufacturing index dipped sharply to -14.9 for October from 2.5 previously, with a dip in orders. The Federal Reserve starts its blackout ahead of its interest rate decisions next week.

The critical bit of economic data still left on the docket is the headline release from the advanced GDP figure, which indicates a positive reading of over 2%. A strong reading could reverse the trend we have been seeing.

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