Spectrum FX Daily Report

GBP:??Confusion reigned in the U.K. yesterday as conflicting reports about the Bank of England's intentions in the bond markets undermined the message that Governor Andrew Bailey had tried to convey on Tuesday. Bailey had said - with unusual candour - that pension funds had three days to sort out their current positions, sending the pound sharply lower. However, the sterling recovered most of its losses after the Financial Times reported that Bank officials had privately briefed City bankers that it may after all extend that deadline. For now, the central bank seems to be caught between a rock and a hard place.?On the one hand it is navigating what it has called a "material risk to financial stability" with the gilt market rout exposing vulnerabilities in the pensions sector. On the other hand,?buying bonds doesn't sit well with the BoE's mandate to control surging inflation and BoE officials are anxious to avoid giving the impression that they are buying bonds to support the fiscal plans of the government. Investors suspect the need to avoid further turmoil will prevail for now and the BoE will continue to buy bonds, even if not immediately after Friday's deadline. Ultimately the Bank of England is tasked with creating financial stability, and what they can't allow is for the bond market to be overly volatile. Moreover, the confusion left the pound slightly higher as many traders bet on the Bank of England being forced to extend its outright bond purchases past its self-imposed deadline of Friday.

EUR:?European stock markets are expected to open in a subdued fashion this morning, with investors wary ahead of the release of key U.S. inflation data as well as the continued U.K. market turmoil. Data released from Germany earlier today showed that consumer inflation in the Eurozone’s dominant economy rose by 10% on an annual basis in September, up 1.9% on the month, increasing pressure on the European Central Bank to continue tightening monetary policy. Nonetheless, Bank of France Governor Francois Villeroy de Galhau appeared to leave some room for doubt about the European Central Bank's ability to keep up with the pace of U.S. interest rate hikes. Villeroy said it was too early to say whether the ECB should raise its key rates by 50 or 75 basis points when it meets on October 27th, a week before the Federal Reserve's next meeting. Villeroy also said the bank's refinancing rate should be at its neutral level – or a bit less than 2% – before the end of the year, which would allow ECB room to shrink its balance sheet.

USD:?The U.S. dollar traded in a tight range this morning ahead of the release of widely watched U.S. inflation data. Nonetheless, the dollar remains in demand after minutes of the central bank’s September meeting showed that policymakers unanimously agreed on the need for more monetary tightening to combat inflation. In fact, this is the narrative that is keeping the general trend in risk assets bearish, and the dollar supported. Looking forward, the main focus today will be on the release of the latest U.S. inflation data, which is expected to show that annual CPI inflation remained above 8% in September, remaining close to a 40-year peak hit earlier in 2022.

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