The dollar touched an 18-month high last week after hot US inflation, then retreated when Fed Chair Kevin Warsh gave no signal on another rate rise. Sterling recovered against the dollar and stayed close to multi-month highs against the euro, which remains under pressure from French politics. This week brings UK labour and inflation data ahead of the Bank of England’s 5 November decision, plus flash PMI surveys and a Moody’s review of France on Friday.
Hot US inflation lifts the dollar, but Warsh’s silence takes the heat out
US consumer prices rose 3.7% in September, up from 3.4% and above the 3.6% expected, with a 7.1% jump in gasoline costs driving a 0.6% monthly rise. Core inflation edged up to 2.6% from 2.4%. The dollar hit an 18-month high on the news and bets on an October Fed hike jumped, but the move faded after Warsh, speaking at the IMF meetings in Bangkok, declined to pre-commit to anything and described a global “synchronous tightening”. Markets now price a low probability of a rate rise at the Fed’s 28 October meeting, and Goldman Sachs expects a pause followed by a final hike in December. Fed officials are now in their pre-meeting blackout, so there is little scheduled Fed commentary to move the dollar this week.
UK inflation takes centre stage as Bank of England hike bets build
UK August GDP grew 0.1% against expectations of a 0.1% fall, lifting growth over the three months to August to 0.7%, though services output was flat and construction weak. Markets price a probability above 90% of a Bank of England rate rise to 4.00% on 5 November, and a Reuters poll found 54 of 63 economists expect one. Labour market data on Tuesday and September inflation on Wednesday, forecast at 3.4% after 3.1% in August, are the last major data before the decision. A hotter reading could reinforce November hike expectations, while a softer one could test them. The Chancellor’s 28 October Budget adds a further event for sterling.
French unrest and a rating review keep the euro under pressure
The euro touched a 17-month low against the dollar on 5 October and was near a 16-month low against sterling last week, as the gap between French and German 10-year borrowing costs stayed around 1.4 percentage points, close to its widest since 2012. Unrest in France over the weekend added to the pressure, and ECB President Christine Lagarde has said France should address its structural issues through domestic fiscal policy. A French budget vote on Tuesday and a Moody’s review on Friday, with France currently rated Aa3 on a negative outlook, are the key tests. Bets on another ECB rate rise in October have faded, with the next decision on 29 October.
The week ahead:
- UK labour market data – 20/10 – GBPUSD, GBPEUR
- French budget vote – 20/10 – GBPEUR, EURUSD
- UK inflation (September) – 21/10 – GBPUSD, GBPEUR
- Flash PMI surveys, UK, eurozone and US (October) – 23/10 – GBPUSD, GBPEUR, EURUSD
- Moody’s review of France – 23/10 – GBPEUR, EURUSD
With UK inflation, French politics and a crowded run of central bank decisions ahead, it is worth speaking with your currency specialist about how these developments could affect any transfers you have planned in the coming weeks.
