Sterling edges higher but remains fragile

Sterling pushed higher despite the negative headlines from the Tory Party Conference. Whilst the conference was meant to be PM Liz Truss’s victory parade, based on reports, it appears to be a grilling on leadership. So far this week, the government has done a U-turn on the 45p tax. Truss failed to commit her trust in the Chancellor when asked twice, and Truss loyalists called for General Election.

In the meantime, Bank of England policymaker Catherine Mann said a weaker pound and the UK government’s support for household energy bills were behind her push for the most significant interest-rate hike in more than three decades last month. In addition, Mann expressed concern about the pace of monetary tightening coming from the US Federal Reserve, noting that in the past, this led to higher inflation in the UK due to a stronger US dollar.

Looking at the remainder of the week, it is very quiet in terms of economic data. The market will continue to focus on the evolving political situation.

US dollar loses ground ahead of jobs data

The dollar reversed recent gains against several major trading pairs following improved risk sentiment across financial markets. Expectations are now increasing that the Federal Reserve may taper the approach of hyper hiking of interest rates. Hawkish comments from Fed members on Tuesday were unable to prevent it from losing ground as the US Dollar Index fell towards 110, and globally stocks rebounded.

Looking ahead to the remainder of this week, the forthcoming releases of the ISM Services PMI data will attract attention to the US economic calendar. The Services PMI data is forecasted to decline to 56.0 against the previous print of 56.9. In addition, the New Orders Index data indicates that forward demand for services is expected to fall to 58.9 versus the prior release of 61.8.

Towards the end of this week, focus will turn to the release of September’s jobs report. Consensus forecasts expect another robust month for job growth with a rise of 280k for non-farm payrolls predicted. Meanwhile, the unemployment rate is forecasted lower to 3.6%. Average earnings growth will be closely reviewed after rising by 0.3% m/m last month, the lowest increase since April 2022.

Eurozone inflation reaches double

The euro started on the front foot this week, gaining ground against the US dollar. The single currency found support following the announcement that the Eurozone inflation rate reached double digits in September as the war in Ukraine and the constraints caused by the pandemic lasted longer than initially expected. European Central Bank President Christine Lagarde stated that monetary policy must ensure that price shocks do not become entrenched.

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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