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Will Sunak Budget Strengthen The Case To Raise Rates?

Sterling remains in its current trading range ahead of the Bank of England (BoE) rate decision where there is a greater than 60% probability of a rate hike. However, it may not be as clear cut as some expect, as three members of the voting committee have expressed some concerns. In the meantime, the Confederation of British Industry (CBI) Retail Sales Index strengthened to 30 for October from 11 the previous month and above consensus forecasts. Retailers are more optimistic over the outlook for November sales which offered some potential relief over near-term consumer spending trends. Black Friday and Cyber Monday sales could be interesting to watch towards the end of the month. Reservations remain surrounding the UK recovery profile which limited the scope for aggressive BoE rate hikes and consequently Sterling.  

Chancellor Sunak will present his budget statement on Wednesday with markets assessing the overall stance. Much of the news has already been leaked to the press. It is expected that Sunak will reveal a more expansionary plan than expected. The Office for Budget Responsibility (OBR) is expected to revise its higher economic growth forecast for 2021 from its update in March. As a partial offset, it may lower its expectation for 2022. The positive news could assist the case to raise interest rates.

Dollar Remains Well Supported Following A Surge In New Home Sales

The US Dollar has spent the majority of October steadily reversing the sharp gains made in late September. The rally towards the end of September was driven by the Federal Reserve (Fed) signalling a hiking of interest rates sooner than initially expected. Markets are currently pricing in a possible second-rate hike for 2022 as inflationary pressures remain, with the yield on US Treasuries continuing to move higher. The dollar has lost some of September gains as many central banks have recently indicated to hiking rates sooner as a reaction to the rising inflation rates and global supply chain pressures. The BoE has signalled a rate hike this year with further hikes in 2022.

Yesterday, we saw the Dollar well supported during the afternoon session following a surge in new home sales. New home sales soared 14% to an annually adjusted rate of 800k in September, well above market forecasts of 760k and the highest reading for 6 months. We look forward to a busier economic calendar for the remainder of this week with Gross Domestic Product (GDP) numbers set for release on Thursday and both Personal Consumption Expenditures (PCE) and Michigan Consumer Sentiment Index (MCSI) is released on Friday.

Today markets will look to US Durable Goods Orders Data for the latest guidance on the position of the US manufacturing sector.

Consumer Sentiment Rises Ahead Of Tomorrow’s European Central Bank (ECB) Meeting

The single currency continues to remain in tight ranges ahead of the ECB meeting tomorrow. The ECB’s September meeting saw the Governing Council decide to reduce the pace of asset purchases under the Pandemic Emergency Purchase Programme (PEPP) while keeping all other measures unchanged. Since then, a sharp rise in global energy prices has added upside risk to the inflation outlook, resulting in several central banks changing their rhetoric. However, the ECB has remained firm by stating that inflation is transitory. As a result, the market will be particularly keen to articulate the rhetoric released by the Central Bank. Currently, markets are now pricing in a 10 bp hike in the deposit rate in late 2022.

In the meantime, consumer sentiment in Germany is expected to strengthen in November, due to increased propensity to consume and declining propensity to save. This forward-looking consumer sentiment index forecasts confidence among households rising to 0.9 points in November from a revised figure of 0.4 points in October. Economists polled by The Wall Street Journal anticipated a drop, expecting sentiment to decline to minus 0.3 points.

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