UK: Weekly FX Market Update 10 October

GBP

• On Friday, the Bank of England (BoE) will withdraw its temporary support in the gilts market. What impact will this have?

• Bloomberg WIRP gives a 100% probability of a 1% rate hike on both November 3rd and December 15th.

• What will the new UK government actually be able to change, in terms of fiscal policy and supply-side reforms?

• This week starts slowly with a US holiday on Monday and then moves to the release of employment data on Tuesday and GDP on Wednesday.

• The market is waiting for the Office for Budget Responsibility (OBR) to publish its report on how much the government’s plans will cost the country.

Last week Prime Minister Truss and Chancellor Kwarteng made speeches at the Tory party conference, continuing to push their narrative of unfunded tax cuts. However, there is resistance to their plans inside the Tory party and it is unclear just to what extent that PM Truss can implement her plans. The market has already shown its distaste for her ideas by selling the pound and spiking treasury rates higher, causing the BoE to intervene and support the gilts market.

EUR

• The European Commission is trying to agree on an energy price cap, with the aim of reducing inflation. Ukraine is pushing back Russia’s invasion, good news, but it does raise the possibility of President Putin resorting to other types of weapons to try and regain territory.

• ECB members last week continued with their hawkish rhetoric, with Eurozone headline CPI now in double digits at 10%.

• Bloomberg WIRP gives a 90% probability of a 0.75% rate hike on October 27th and a 0.5% rate hike on December 15th.

Eurozone data releases are minimal in the week ahead, so EURUSD could be moved by US data on Wednesday, Thursday and Friday.

USD

• The Federal Reserve continues to repeat its hawkish mantra.

• The week ended with US Nonfarm Payrolls for September. 263k jobs were added and the unemployment rate fell from 3.7% to 3.5% .

• Bloomberg WIRP gives a 90% probability of a 0.75% rate hike on November 2nd and December 14th.

Last week ended with a reasonably strong US jobs report, which supports the above probability of a hike by the Fed, as opposed to its possibly pausing in its interest rate hiking cycle.

This week, the FOMC meeting minutes and the Producer Price Index are announced on Wednesday.

Thursday sees Consumer Price Index data released, and Friday has the Retail Sales data announced. Is there something on the horizon that can halt the FOMC from raising rates, or will we continue to see USD strength?

Events for the weekend ahead:

Mon Oct 10

USD/CAD/JPY Holiday

Tues Oct 11

07:00 GBP Claimant Count Change/Average earnings Index

19:35 GBP BoE Bailey Speaks. Panel discussion

Wed Oct 12

07:00 GBP GDP

13:30 USD PPI

14:30 ECB Lagarde Speaks. Panel discussion

19:00 USD FOMC Meeting Minutes

Thu Oct 13

13:30 USD CPI

Fri Oct 14

13:30 USD Retail Sales

15:00 USD Prelim UoM Consumer Sentiment

23:59 Bank of England Withdraws Gilt Support