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Will politics, economic data or BoE speakers unhinge sterling further?

Sterling had another volatile week, making gains in the early part of the week before succumbing to pressure in the second half. Initially, the sterling made gains as sentiment picked up following BoE’s temporary gilt purchases, but yields rose again over the past week. However, it should also be noted that the UK was already fragile following the AA UK credit rating outlook being cut by S&P to negative from stable. At the Tory party conference, the government U-turned the abolition of the 45p tax rate and may bring forward its fiscal plans and OBR forecasts. However, as the week progressed, uncertainty over the timing of the UK’s medium-term fiscal statement grew. According to the Treasury Committee, the report would be brought forward, but Chancellor Kwarteng stated that the plan would be delivered on November 23rd and in line with his original timetable.

However, later in the week, GBPUSD moved lower following some solid economic data from the US, which further reinforced the direction of interest rates in the US. By the end of the week, overall confidence in the UK outlook remained weak, with Fitch cutting its rating outlook for the Bank of England amid fears over the UK fundamentals.

Looking to the week ahead, political and economic events could inject additional volatility into the sterling. UK parliament returns from its conference recess on Tuesday with the spotlight on PM Liz Truss (including PMQs on Wednesday). Recent polls show a widening lead for Labour whilst headlines suggest discontent amongst backbenchers is growing.

In terms of economic data, several key UK financial data updates will release ahead of the November BoE policy announcement. The focus will be on the labour market, particularly salary inflation (Tue) and monthly GDP for August (Wed). Key BoE speakers will also be watched closely; these include Governor Andrew Bailey (Tue) as well as Pill, Cunliffe, Mann and Haskel throughout the week. Given the recent Gilt operations and the pressure to raise interest rates, the market will decipher their rhetoric for clues on future policy.

US = Dollar rebounds on hawkish comments. Will this week’s data reinforce this?

It was a week of two halves, with a disappointing day in the first half of the week dragging rate expectations, followed by hawkish rhetoric and strong payrolls. In the early part of the week, we saw risk-off as ISM manufacturing index retreated to its weakest reading since May 2020, with new orders dipping back into contraction territory. This was followed by a decline in job openings, the sharpest monthly decline on record, whilst the ISM non-manufacturing index declined marginally. On the whole, the triple run of disappointing data triggered renewed doubts about whether the Federal Reserve would be able to draw back from aggressive monetary tightening.

By the end of the week, this all changed following hawkish tones from central bankers and solid payrolls. Minneapolis Fed President Kashkari stated that he sees almost no evidence that inflation has peaked. Chicago Fed President Evans said that core inflation is a concern and that the Fed will look to raise rates by a further125 basis points over the next two meetings to 4.50-4.75%. In the meantime, Cleveland Fed President Mester stated that the Federal Reserve will not be cutting rates at all in 2023. The highly anticipated monthly payrolls (a preferred measure of job creation) showed jobs market continued generating jobs at a steady pace last month and beating expectations.

Looking to the week ahead, the market will focus on data and key speakers. Wednesday sees the release of the FOMC minutes; these will be deciphered for clues on policy action moving forward. Headline consumer inflation is set for release on Thursday. Headline CPI inflation fell back in the past two months, led by lower energy prices. However, it remained high at 8.3% in August; will this trend continue? Consumer data in the form of retail sales and the University of Michigan consumer sentiment survey will release on Friday.

Inflation hits record highs but markets continue to focus on central bankers for clues.

Like sterling, the single currency trades on the back of risk trends against the US dollar with similar problems that underpin confidence. Overall, euro confidence remained fragile, especially given the significant uncertainty over Ukraine developments. Economic data remains challenging, with consumer inflation increasing to a fresh record high of 10.0% for September from 9.1% and above consensus forecasts of 9.7%. Coupling this, the Eurozone Manufacturing PMI declined marginally, recording a 27-month low with the sector confirmed in contraction.

ECB council member Villeroy stated that interest rates will be raised as much as necessary and that the bank should go to a neutral rate without hesitation by the end of the year. He added that the bank might slow the pace of hikes in 2023. ECB Lagarde commented that, at a minimum, the bank has to stop stimulating demand. In the meantime, the ECB minutes from the September meeting stated that inflation is far too high and likely to stay above target for an extended period. Many members back the rate increase of 75 basis points, although some preferred a 50 basis-point hike.

Looking to the week ahead, it is a relatively quiet week in terms of meaningful data. As always, the market will keep a close on the rhetoric of key ECB officials, including President Christine Lagarde (Mon/Wed) and Chief Economist Philip Lane (Mon/Tue) at different events. The ongoing situation in Ukraine means there is a risk of increased volatility.

The latest round of inflation figures revealed that price increases in the 19 countries that make up the euro area rose to 10.1% year-on-year in September, up from 9.1% in August and exceeding expectations of 9.7%. Following the inflation announcement, investors expect a 75-basis point rate hike at the October 28 meeting to curb soaring prices. Market participants will also get the first September outturns for Italy and Spain on Wednesday.

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