Spectrum FX Daily Report

The most noteworthy move was once again in sterling, which rallied sharply during the London trading session, as reports emerged that the UK government was contemplating further concessions on its highly controversial budget announcement. Chancellor Kwarteng had been in the US this week, but has cut his trip short for reported talks with PM Truss over certain aspects of the mini-budget. Downing Street spokespeople have, unsurprisingly, denied any and all claims that another U-turn is on the way, but markets are pretty confident that we’ll get news to the contrary some time soon.

Next week will be a hugely important one for UK financial markets. The Bank of England has indicated that it will not continue to prop up gilt markets beyond Friday, and there are real concerns that without additional bond purchases, or signs of a backtrack on the budget, we could see another rout in gilts in the coming days. Early reports suggest that the government may be contemplating increasing corporation tax next year, but in reality we have very little concrete details on what this potential U-turn could look like. At any rate, the mere speculation that some of these policies could be ditched has supported the pound, which was back trading above the 1.13 level on the dollar this morning.

Markets mostly overlooked yesterday’s stronger-than-expected US inflation data. Once again, economists had underestimated both the headline and core inflation numbers, a common trend in the past year, as both surprised to the upside. While the headline measure continues to ease from its highs (8.2%), the core print has jumped to a fresh four decade peak (6.6%). This will be a big concern for Federal Reserve members, which will almost certainly respond by delivering another 75bp interest rate hike at the November FOMC meeting. The dollar initially rallied on the news, but quickly gave up all of its gains. As we noted prior to the inflation report, markets were already fully pricing in another bumper hike at the next Fed meeting, so in actuality the data doesn’t change the bank’s decision making too much.

A broad improvement in risk sentiment can also partly explain the retracement in the dollar, which enabled EUR/USD to briefly rally above the 0.98 level. There was no clear catalyst for the rebound in risk currencies, although we would argue that the news of a possible U-turn from the UK government has somewhat calmed investors nerves in wider financial markets. The common currency also appears to have been supported by a handful of hawkish comments from European Central Bank members, which have talked up the need for a continued aggressive policy stance. ECB members Kazimir and Kazaks have both voiced support for a 75bp rate hike in October in the past 48 hours or so, while also suggesting that another large rate increase will likely be needed in December.

Attention in markets this afternoon will be on the US, with the release of the latest retail sales figures for September. Economists are pencilling in another modest monthly expansion in sales (+0.2%), which if confirmed may further support the thesis that US consumers remain unperturbed by rising prices, and that a prolonged downturn in activity may will be avoided.

For a live rate or to book a trade please contact us.

T: +44 203 440 7550 | E: [email protected] | W: www.spectrumfx.co.uk