Sterling eases against strong dollar as UK factory activity dips

British Pound

Reuters: Sterling dipped against a firming dollar on Tuesday as survey data confirmed a slowdown in factory activity in September, but the British currency was still in sight of recent highs. The pound was down 0.4% at $1.33280 a day after closing out its strongest quarter in two years alongside a broader improvement in risk appetite. It hit a more than two-year high against the greenback just last week. But the dollar was firmer across the board on Tuesday, after Federal Reserve Chair Jerome Powell pushed back against bets on more supersized interest rate cuts.

The centrepiece of this week for markets is the U.S. jobs due on Friday, which will offer clues about the health of the world's biggest economy and the trajectory of Fed policy. In the mix in Britain, the S&P Global UK Manufacturing Purchasing Managers' Index slipped to 51.5 in September, unchanged from a preliminary estimate, as British manufacturers worried about the new government's first budget. Sterling was flat against the euro, at 83.26 pence to the common currency, a day after firming to its strongest since April 2022.

Weighing on the euro were rising expectations of European Central Bank policy easing in October on top of an already-priced December cut, after soft inflation prints and data showing manufacturing activity across the euro zone declined at its fastest pace this year in September. In contrast, stubborn British inflation has fuelled bets of slower monetary policy easing in the United Kingdom. The Bank of England is widely expected to lower interest rates by 25 basis points next month, but only one rate cut is fully priced in between now and the end of the year. "The pound is taking a little bit of backseat this week and riding the wave of external catalysts elsewhere," said Michael Brown, senior research strategist at Pepperstone.

In the medium term, investors are looking to the Oct. 30 budget when new finance minister Rachel Reeves will publish her first tax and spending plans. "The big risk to the pound at the moment is the budget goes too far and that chokes off the economic recovery and then you see cable make a relatively rapid decline from the two and a half year high where we currently trade," said Brown. Cable is market jargon for the pound traded against the dollar.

US Dollar

Reuters: The dollar held onto its sharpest gains in a week on Wednesday after an Iranian missile attack on Israel drove buying of safe assets as investors fretted about the widening of conflict in the Middle East. Moves in Asia were slight, though most currencies were attempting to regain some ground after sharp falls in the previous session. The euro eased 0.06% to $1.1060, following its largest drop in nearly four months on Tuesday.

The Australian and New Zealand dollars erased early gains to last trade 0.06% and 0.25% higher, respectively, at $0.6887 and $0.6296. The kiwi was further pressured by bets of more aggressive easing from the Reserve Bank of New Zealand RBNZ when it meets next week, with markets pricing in an 87% chance of a 50-basis-point cut. Iran said on Wednesday its missile attack on Israel, its biggest military assault on the Jewish state, was over, barring further provocation, while Israel and the United States promised to retaliate against Tehran as fears of a wider war intensified.

Israel said Iran fired more than 180 ballistic missiles and Iran's Revolutionary Guard Corps said the attack was retaliation for Israeli killings of militant leaders and aggression in Lebanon against the Iran-backed armed movement Hezbollah. Markets' response to the Middle East tensions thus far has largely centered on oil prices and ANZ analysts noted further moves will likely be determined by Israel's response and whether it attacks Iran's military or oil industry.

Elsewhere, the bid for safety kept the Swiss franc steady at 0.8460 per dollar. Sterling fell 0.11% to $1.3272, while the U.S. dollar rose marginally to 101.27 against a basket of currencies. The dollar index rose about 0.5% in the previous session, its largest rise since Sept. 25, which was also helped by a stronger-than-expected reading on U.S. job openings. Westpac strategist Imre Speizer said the Middle East was unpredictable but that in the absence of escalation market sentiment could recover and focus return to economics.

In Japan, the yen was last 0.14% weaker at 143.78 per dollar. The country's newly appointed economy minister, Ryosei Akazawa, said on Wednesday that Prime Minister Shigeru Ishiba expects the Bank of Japan to make careful economic assessments when raising interest rates again. Focus now turns to U.S. private payrolls data due later on Wednesday, with traders also keeping a wary eye on a labor dispute at U.S. ports.

East and Gulf Coast dockworkers began their first large-scale strike in nearly 50 years on Tuesday, halting the flow of about half the country's ocean shipping. In a nationally televised debate on Tuesday, U.S. Senator JD Vance, Republican Donald Trump's pick as his vice presidential running mate, squared off against Minnesota Governor Tim Walz, who Democrat Kamala Harris tapped to be her No. 2, though the event was met with muted market response.

South African Rand

Reuters: The South African rand weakened against a stronger dollar on Tuesday, after Federal Reserve Chair Jerome Powell poured cold water on bets of more big interest rate cuts. At 1531 GMT, the rand traded at 17.4050 against the dollar , 0.8% softer than its previous close. Powell adopted a more hawkish tone in a speech at a conference on Monday, saying the U.S. central bank was likely to stick with 25 basis point interest rate cuts from now on, while U.S. data on Tuesday also showed a solid economy.

Reports of an imminent missile attack by Iran on Israel also drove safe haven demand. The dollar index was last up 0.4% against a basket of currencies. Locally, a purchasing managers' index survey showed South African manufacturing activity rose in September, thanks to improved demand and a boost in sentiment from an interest rate cut by the country's central bank. The rand is set to take cues from global drivers such as U.S. economic data releases this week, with slim pickings on the domestic front.

On the Johannesburg Stock Exchange, the blue-chip Top-40 index, closed little changed. South Africa's benchmark 2030 government bond was weaker, with the yield up 12 basis points to 8.965%.

Global Markets

Reuters: Most Asian stock markets sank on Wednesday, catching up with the sell-off on Wall Street after Iran's ballistic missile strike on Israel provoked fears of a wider regional conflict, while crude oil pushed higher on the risk of supply disruptions. Investors flocked to safer assets, keeping U.S. Treasury yields depressed in Asian time, while gold traded not far from an all-time high. The safe-haven dollar traded close to its strongest in three weeks versus the euro. Macroeconomics also buoyed the dollar, with a resilient U.S. job market arguing for a smaller Federal Reserve interest-rate cut in November, and eurozone inflation trends backing a European Central Bank easing this month.

Japan's Nikkei, slumped 2% as of 0444 GMT, while South Korea's KOSPI, opens new tab dropped 0.6%. However, Hong Kong's Hang Seng, opens new tab soared 6% as Beijing's stimulus push continued to buoy sentiment. That helped to lift MSCI's broadest index of Asia-Pacific shares, 0.6%, despite broadly fragile investor sentiment. Mainland Chinese markets were shut for the week-long Golden Week holiday. Trading in Taiwan was suspended due to a typhoon.

U.S. S&P 500 stock index futures weakened 0.15%, after the cash index, lost 0.9% overnight. But pan-European STOXX 50 futures pointed up 0.4%. "In the chain of potential market volatility shocks, geopolitics will typically trump economics, corporate earnings, or a central bank response - largely because most market players are poor at pricing risk around these events," said Chris Weston, head of research at Pepperstone. "While these events typically reconcile in a market-positive fashion, the tail risk it can throw up is clearly significant," Weston said. "The situation remains fluid, and the slightest calming or increased aggression in the rhetoric from Israel or Iran could result in a sizeable impact on sentiment in markets." Iran said early on Wednesday that its missile attack on Israel was finished barring further provocation, although Israel and the U.S. promised retaliation.

Brent crude futures gained 1.5% to $74.66 per barrel, extending the 2.5% advance from Tuesday. U.S. WTI futures climbed 1.7% to $71 per barrel, after Tuesday's 2.4% rally. "Speculation of an Israeli strike on Iranian oil fields seems unlikely, as such a move would likely drive oil prices toward $80, displeasing Israel's allies, who are making strides against inflation," said Tony Sycamore, an analyst at IG. "Instead, strategic Israeli strikes on critical weapons factories and military objectives are more probable," he said. In such a situation, "there is hope for a return to the more contained shadow conflict that has persisted between Israel and Iran's regional proxies" for most of the past year, Sycamore said.

Gold eased 0.3% to $2,654.27 per ounce, following a more than 1% jump in the previous session that brought it close to last month's record high at $2,685.42. Benchmark 10-year Treasury yields ticked down about 1 basis point (bp) to 3.7353%. The dollar index , which tracks the U.S. currency versus the euro and five other major rivals, was steady at 101.27 after pushing as high as 101.39 on Tuesday for the first time since Sept. 19. Europe's shared currency was little changed at $1.1061 following a 0.6% drop in the previous session, when it dipped to $1.1046 for the first time since Sept. 12. Euro area data on Tuesday showed inflation fell below the ECB's 2% target last month, bolstering bets for a quarter-point rate cut on Oct. 17.

Meanwhile, U.S. figures overnight showed a solid economy, a day after Fed Chair Jerome Powell pushed back against the likelihood of another 50 basis point rate cut when the U.S. central bank meets next month.

Job openings unexpectedly increased in August after two straight monthly decreases, but hiring was soft and consistent with a slowing labour market. Private payrolls data is due later on Wednesday, ahead of potentially crucial monthly non-farm payrolls numbers on Friday. A crippling U.S. dock strike, that could cost the economy $5 billion each day, will also be front of investor minds, with hopes for a quick end dashed by a lack of active negotiation overnight.

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