Keep An Eye On The Liquidity Factor

Impact on GBP:

No risk premium anticipated before the UK budget

Sterling remains firmly in a wait-and-see mode ahead of tomorrow’s Budget announcement by Chancellor Rachel Reeves. Two technical factors could influence a potentially adverse market reaction in the Pound.

First, there’s currently no political risk premium factored into Sterling. In past instances of political or gilt-related instability in the UK, the EUR/GBP risk premium has ranged between 3-5%.

Second, the latest CFTC data shows speculators maintain significant long positions in the Pound. As of 22 October, net-long GBP positions led the G10 currencies at 32% of open interest, withstanding the shift back toward the Dollar seen in other major currencies.

The GBP/USD remains vulnerable ahead of tomorrow’s Budget and the upcoming US election, with risks tilted towards a move to the $1.2800-1.2850 range.

No Major Data

Impact on EUR:

Supported by deleveraging in less liquid currencies

When liquidity becomes a key factor in FX, the Euro may find some support in cross pairs. This support could partially stem from the unwinding of Nordic FX positions, which are often traded against the Euro. Many banks are monitoring for any sharp underperformance in NOK, a frequent indicator of FX liquidity conditions.

Domestically, a typically neutral Governing Council member, Luis de Guindos, shared unexpectedly hawkish comments yesterday, contrasting with the generally dovish tone in recent ECB post-meeting communication. De Guindos highlighted “substantial risks” around the inflation outlook, somewhat shifting focus away from growth concerns and risks of undershooting the inflation target.

While Guindos’ comments alone may not reverse the dovish trend across the EUR curve, the USD two-year swap rate spread remains at its widest since April, around 160bp (70bp wider than last month). This continues to suggest further pressure on EUR/USD, with risks for the pair still leaning slightly to the downside in the near term, despite a more balanced outlook. The Eurozone and ECB speaker calendar is empty today.

No Major Data

Impact on USD:

Data testing begins today

There is a significant risk of a liquidity drain approaching 5 November, as the binary nature of the vote may prompt broader deleveraging across currency markets. The G10 performance since the weekend suggests a mix of liquidity factors and increased Trump hedges are currently impacting FX. More liquid and less Trump-exposed currencies (USD, EUR, CHF, and GBP) are outperforming those that are less liquid and more sensitive to protectionism (AUD, NZD, NOK, and SEK), a trend we expect to persist in the days ahead.

On the US macro front, today's release of September’s JOLTS job openings data could shift market focus from election-related trades. The recent hawkish trend in USD swap curve pricing could reverse only with signs of a cooling job market, such as a reversal of August’s rise in job openings from 7.7m to 8.0m. The consensus is for job openings to remain steady at 8.0m. Also on the calendar are the Conference Board Consumer Confidence index, expected to show a slight increase in October, and September’s wholesale inventories.

Should the US macro picture hold steady, the Dollar may see further gains driven by US election hedges and broad deleveraging.?

Data: CB Consumer Confidence & JOLTS Job Openings - 2pm

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