UK: Weekly FX Market Update 3 October

GBP

• GBPUSD makes a new all-time low at 1.0357 and then rallies 8% before slumping lower into the weekend, down over 2% on the week.

• The Bank of England (BoE) is forced to intervene in the gilts market, adding liquidity to the market when it was intending to start quantitative tightening.

• The Bank’s intervention gave the pound some support as the potential for an inter-meeting interest rate hike grew.

• The volatility in the currency and gilt markets was attributed to Chancellor Kwarteng’s fiscal changes last week.

• The housing market could be on a cliff-edge, with mortgages being pulled by lenders and mortgage rates hitting 5%-6% (up from 2-3% just six months ago).

• The Labour party now has a 33-point lead over the Tory party in the polls.

• News that the Chancellor has made a U-Turn on cutting the 45p top tax rate made the pound jump higher across the board today (Monday 3 October).

The pound collapsed overnight last Sunday as the markets reacted to Chancellor Kwarteng’s unfunded tax giveaways, worth £45 billion. This is a policy the Government has since defended and won’t be reversing.

The pound subsequently gained some composure after the BoE intervened in the gilt market; this is due to end on 14th October. The next Bank of England meeting is on November 3rd.

The Prime Minister and Chancellor met the Office for Budget Responsibility (OBR) on Friday, with the prospect that forecasts might be released early. This didn’t occur, however, and the forecasts are still due to be announced by the OBR on 23rd November.

This week is very light on UK data releases, but we do have the important US Non-Farm Payrolls report on Friday (October 7th). If the market gives up hoping that the BoE will support the pound, or that the government will change tack, we could see further pound weakness.

EUR

• Inflation hit 10% for the first time in the Eurozone’s history last week.

• ECB Board member Rehn said that small rate hikes are not enough in the current situation, and that ‘significant’ rate hikes are needed in the coming meetings.

• The Nord Stream pipeline was ruptured in multiple places, with the European Union blaming ‘sabotage’.

• Russia’s annexation’ of four regions of Ukraine in the Donbas and has said that it will use all weapons at its disposal to defend its territory.

EURUSD managed to steady itself last week as the market took notice of the historical levels of headline inflation and considered what size rate hike will be agreed upon. Currently, Bloomberg WIRP has a 90% probability of a 0.75% rate hike on October 27th by the ECB.

However, it is the Russian war which is causing much concern. The market is awaiting Russia’s next move when, as expected, Ukraine the illegally annexed territories in the Donbas.

USD

• The Fed repeated its hawkish rhetoric, with Fed Vice Chair Brainard saying that the Fed is committed to avoiding pulling back prematurely on interest rates, and that policy needs to be restrictive for some time.

• As the UK and Eurozone fundamental backdrop worsens, the USD is pushing higher.

• Personal Consumption Expenditure, the Federal Reserve’s favoured inflation gauge, exceeded estimates, maintaining pressure on the Fed’s inflation policy.

The week to come has few economic releases but will end with the release of US Non-Farm Payrolls.

Last week, US unemployment claims fell and continued to show that the supply of workers has reduced since COVID. Given this, the payroll report on Friday could again be a strong one. Should this materialise, the market may again price in higher interest rates from the Federal Reserve.

Events for the weekend ahead:

Mon Oct 3

15:00 US ISM Manufacturing PMI

Wed Oct 5

15:00 USD ISM Services PMI

Fri Oct 7

07:00 UK Halifax House Price Index

13:30 USD Average Hourly Earnings/Non-Farm Employment Change/Unemployment Rate