Sterling held near one month low after British GDP data

Summary

In currency markets, the dollar index, which measures the greenback against a basket of currencies, edged up 0.05% to 102.94, with the euro down 0.03% at $1.0932. The greenback is up 0.44% on the week, on track for a second straight weekly gain after four straight weeks of declines.

Against the Japanese yen, the dollar strengthened 0.4% to 149.15. Sterling strengthened 0.05% to $1.3065 but remained near a one-month low after data showed Britain's economy grew in August after two consecutive months of stagnation.

The pound was pinned around a one month low on the dollar on Friday, getting little support from data that showed Britain's economy returned to growth in August.

Sterling was last flat on the day on the dollar at $1.3069, just off the $1.3011 hit Thursday, its lowest since mid Sept. It was also flat on the euro, at 83.70 pence to the common currency.

Britain's economy grew in August after two consecutive months of stagnation, providing some relief to finance minister Rachel Reeves ahead of the new Labour government's first budget later this month.

Economic output rose by 0.2% in monthly terms in August, according to figures from the Office for National Statistics that were in line with expectations in a Reuters poll of economists.

Reeves welcomed the news on Friday and said that economic growth was a top priority for the government.

All major sectors showed growth in August, the statistics office said, but weaker-than-expected growth in the dominant services sector was offset by a strong rebound in manufacturing and construction.

It left unrevised its estimates for monthly gross domestic output for July and June, when the economy stagnated, but revised down its estimates for April and May to -0.1% and +0.2% respectively, compared with previous estimates of 0.0% and +0.4%.

Sterling was little changed after the figures were released, with investors continuing to bet on a quarter-point rate cut by the Bank of England in November.

Compared to a year ago, economic output was 1.0% higher, below the 1.4% growth forecast by economists, a miss that reflected the downward revisions to previous months.

But the pound was little moved. The data didn't change the big picture a great deal, it provides confirmation that the UK economy is slowing in the second half of this year, but that's understandable, I don't think anyone thought that the strong pace of growth in the first half of the year was sustainable.

For the Bank of England, next week is much more important with the latest inflation and labour market reports due, which will be important in terms of determining the kind of messaging we get for the Bank of England ahead of their next meeting in November.

The pound for much of this year had been supported by expectations that the Bank of England will cut rates more slowly than peers such as the Federal Reserve and European Central Bank.

But this has been changing, and much of the currency's decline in the past month against the dollar has been down to shifts in those relative expectations. Markets have reduced the amount of Fed easing they expect while, in contrast, BoE governor Andrew Bailey said last week the central bank could become 'more aggressive' on rate cuts if inflation pressures continue to weaken.

However, in addition to being broadly steady on the dollar the pound was little changed on the euro at 83.67 pence to the common currency.

Traders are also watching French politics, after the government on Thursday delivered its 2025 budget with plans for 60 billion euros ($65.5 billion) worth of spending cuts and tax hikes on the wealthy and big companies to tackle a soaring fiscal deficit.

The budget is unlikely to pass until December, as French Prime Minister Michel Barnier and his allies in President Emmanuel Macron's camp lack a majority by a sizeable margin and will have little choice but to accept numerous concessions.

U.S. CPI and jobless claims data Thursday did little, in combination, to shift market pricing for the Fed, and they continue to see two 25 bp rate cuts at each of its remaining meetings.

Markets see at least one 25 bp BoE cut across its two remaining meetings and around a 40% chance of a second.

The U.S. dollar was flat against major currencies on Friday as markets digested a slew of economic data that supported the Federal Reserve's current monetary policy path.

A gauge of U.S. producer prices was unchanged in September, the Labor Department reported, the latest economic data to indicate the Fed will likely cut rates again next month.

Consumer prices in September rose 0.3%, according to data released on Thursday, slightly hotter than expected, while weekly jobless claims surged, pointing to labor-market weakness. The weekly jobless claims data was skewed by Hurricane Helene. Next week's data will be affected by Hurricane Milton, the second hurricane in two weeks to hit the southeast U.S.

The euro was flat at $1.1093, while the dollar was up 0.35% against the Japanese yen at 149.12 .

The dollar index was flat at 102.91, taking a breather after a recent steady climb that took it above 103 on Thursday, its highest since mid-August on the back of traders reducing bets on further jumbo interest-rate cuts by the Federal Reserve at its remaining meetings this year.

Markets are betting a nearly 91% chance of a 25-basis-point cut at the Fed's next meeting and 9% probability of no cut, according to the CME's Fedwatch tool.

That slightly higher inflation print has really backed the market away from being overly aggressive on how deep they were looking for the interest-rate cuts to go by the end of the year, so there was already an overprice in there and that's basically unwound this week.

Markets are also awaiting a news conference from China's finance ministry on fiscal policy on Saturday. The Chinese yuan strengthened 0.22% against the greenback to 7.067 per dollar.

The Australian dollar strengthened 0.22% versus the greenback to $0.6753, while the New Zealand dollar was at $0.611 after the central bank on Wednesday slashed rates by a half point and hinted at further cuts to come.

The Canadian dollar fell to a two-month low against its U.S. counterpart on Friday as investors continued to weigh chances of the Bank of Canada supersizing its rate cuts after a downbeat business survey offset stronger-than-expected jobs data.

The loonie was trading 0.2% lower at 1.3760 per U.S. dollar, or 72.67 U.S. cents, after touching its weakest level since Aug. 7 at 1.3783.

It was the eighth straight daily decline for the currency, the longest losing streak since July. For the week, the currency was down 1.4%, its largest weekly decline since March 2023.

"There is something of a developing clamour for the BoC to up the pace of easing which has driven swap and bond spreads wider in the USD's favour over the past couple of weeks and it will be difficult for the CAD to improve under its own steam while markets are mulling the risk of a 50 bps (basis-point) ease at the end of the month," Shaun Osborne, chief currency strategist at Scotiabank, said in a note.

Canada added 47,000 jobs in September, eclipsing expectations for a 27,000 increase, but the BoC's Business Outlook Survey indicated firms still see weak demand.

That left the market's implied chances of an unusually large half-percentage-point rate cut by the central bank at its next policy decision on Oct. 23 largely unchanged at about 50%.

The BoC is likely to lower interest rates to a neutral setting that neither restricts nor stimulates its economy more quickly than the U.S. Federal Reserve, said analysts, who see weak Canadian growth raising the risk of a sustained drop in inflation below the central bank's 2% target.

Canadian bond yields eased across the curve ahead of a market holiday on Monday for Thanksgiving Day. The 2-year was down 2.7 basis points at 3.077%.

South Africa's rand gained against the dollar on Friday after U.S. data this week helped sustain expectations for an interest rate cut by the Federal Reserve next month. The rand traded at 17.39 against the dollar, about 0.8% firmer than its previous close.

Global stocks rose on Friday, lifted by U.S. bank earnings, and on track for a weekly gain while U.S. Treasury yields were mostly lower after inflation and consumer confidence reports solidified expectations for the path of Federal Reserve rate cuts.

The U.S. producer price index for final demand was unchanged in September, slightly below the forecast of economists polled by Reuters for a gain of 0.1%. It followed an unrevised 0.2% increase in August, indicating inflation continues to cool and giving the Fed leeway to continue cutting interest rates.

In the 12 months through September, the PPI increased 1.8% versus the 1.6% estimate. On Thursday, the consumer price index turned out to be slightly higher than expected as goods costs increased.

The University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 68.9 this month, compared with a final reading of 70.1 in September and below the 70.8 estimate as high prices discouraged shopping.

On Wall Street, U.S. stocks advanced, with the Dow and S&P 500 closing at record highs, as bank shares jumped 4.21%, its biggest daily percentage gain since May 2023, at the start of the quarterly earnings season. JP Morgan rose 4.44% and Wells Fargo shot up 5.61%.

Shares of big banks helped boost the Dow and S&P 500 to fresh record highs on Friday, Banks have been as big a question mark as anybody - the level of rates, the yield curve, capital markets activity, et cetera and two of our biggest banks today are saying well everything's going to be pretty good.

S&P 500 earnings growth is expected to be 4.9%, LSEG data showed, down slightly from 5.2% at the start of October.

The Dow Jones Industrial Average rose 409.74 points, or 0.97%, to 42,863.86, the S&P 500 rose 34.98 points, or 0.61%, to 5,815.03 and the Nasdaq Composite rose 60.89 points, or 0.33%, to 18,342.94.

Gains were capped, however, by an 8.78% tumble in Tesla shares as the electric vehicle maker promised much at its robotaxi event with few practical details.

MSCI's gauge of stocks across the globe rose 4.56 points, or 0.54%, to 852.75 and was on track for its fourth weekly gain in five weeks. In Europe, the STOXX 600 index closed up 0.55% as investors shifted their focus to China's fiscal stimulus, corporate earnings seasons and the European Central Bank's expected rate cut next week.

Bets that the Fed will cut rates by 25 basis points at its November meeting have been choppy in recent sessions, and stand at 88.4%, with markets pricing in a 11.6% chance of no change in rates, CME's FedWatch Tool showed.

Markets had been fully pricing in a cut of at least 25 basis points, with a chance for another outsized 50 bps cut last week, until a strong U.S. payrolls report prompted investors to dial back expectations.

Comments from Fed Chair Jerome Powell and other central bank officials have signaled a shift in focus from combating high inflation to labor market stability.

On Thursday, several policymakers said the data gives the Fed room to continue cutting rates, but Atlanta Federal Reserve Bank President Raphael Bostic told the Wall Street Journal he was open to skipping a rate cut.

U.S. yields were choppy around the data as investors gauged the Fed's rate path before heading lower. The benchmark U.S. 10-year note yield 0.5 basis point to 4.089% while the 2-year note yield, which typically moves in step with interest rate expectations, declined 5 basis points to 3.949%.

The 10-year yield is up about 11 bps for the week, poised for its fourth straight weekly advance. The 2-year yield is nearly 7 bps on the week, on track for a second straight weekly climb.

Crude prices slipped, but secured a second straight weekly climb, as investors weighed the impact of hurricane damage on U.S. demand against any broad supply disruption if Israel attacks Iranian oil sites.

U.S. crude settled down 0.38% to $75.56 a barrel and Brent fell to settle at $79.04 per barrel, down 0.45% on the day.

Looking Ahead at this Week’s Markets

Here's a detailed look at the key factors likely to influence currency markets, equities, commodities, and geopolitical events in the upcoming week:

Currency Markets

The U.S. dollar will remain sensitive to economic data, especially ahead of the Federal Reserve's next meeting. Any signals of further rate cuts or policy adjustments from the Fed could have a significant impact. Key data releases to watch include inflation data (CPI and PPI), retail sales figures, and the University of Michigan Consumer Sentiment Index. Markets are currently pricing in a strong possibility of a 25-basis-point cut, and deviations from this expectation could move the dollar sharply.

Jobless Claims: After last week’s higher-than-expected jobless claims, upcoming labor market data will be closely monitored to gauge the strength of the U.S. economy.

The euro is likely to be influenced by updates from the European Central Bank (ECB). With inflation in the Eurozone cooling, markets are pricing in rate cuts, but upcoming economic data such as industrial production and the ZEW Economic Sentiment report from Germany will be pivotal in shaping market sentiment.

Eurozone Growth Concerns: Ongoing concerns about sluggish growth in the Eurozone’s largest economies, especially Germany, could keep the euro under pressure.

With markets ripe of BoE rate cut speculation the British pound will likely remain volatile as markets continue to digest last week’s GDP growth figures, which were below forecasts. The Bank of England is expected to cut rates, and inflation and labour market data due this week will be critical in influencing the BoE's decision at its next meeting.

Brexit Developments: Ongoing trade negotiations between the UK and EU, particularly related to Northern Ireland, could also weigh on sterling.

The yen remains near a multi-year low against the U.S. dollar. If the yen weakens further, there could be intervention from the BoJ or the Japanese government to support the currency. Additionally, any signs of inflation picking up in Japan could pressure the BoJ to adjust its ultra-loose monetary policy.

As a safe-haven currency, the yen could benefit from any rise in geopolitical tensions or global market uncertainty.

Equities

The U.S. earnings season will dominate headlines, with several big tech companies and major financial institutions set to report quarterly results. Investors will be paying close attention to profit margins, forward guidance, and how companies are navigating high interest rates and inflationary pressures.

Inflation Impact: Retail sales and CPI data will also influence equity markets, as they could shift expectations about future Fed policy. Any signs of inflation persisting could dent equity markets as it would indicate that interest rates may stay elevated for longer.

China will release a slew of important economic data, including Q3 GDP growth figures, industrial production, and retail sales. With concerns about China’s sluggish recovery from the pandemic, weak data could pressure global equities, especially in sectors reliant on Chinese demand such as commodities and luxury goods.

European Markets: In Europe, political tensions, inflation data, and the performance of key sectors like banking and energy will be in focus. Any geopolitical developments, particularly related to Russia-Ukraine or Middle Eastern tensions, could create volatility.

Commodities

Oil prices remain elevated due to ongoing concerns about geopolitical tensions, particularly in the Middle East. Any escalation in the Israel-Gaza conflict or U.S.-Iran relations could cause supply disruptions, which would likely push prices higher. Traders will be closely watching developments on this front.

U.S. Supply Disruptions: After recent hurricanes disrupted U.S. oil production, the focus will also be on how quickly operations can resume, which could impact supply and pricing.

OPEC+ Decisions: Any unexpected moves from OPEC+ to adjust production quotas could lead to further price fluctuations.

Gold is likely to be influenced by both inflation data and geopolitical risks. If tensions rise in the Middle East, we could see an increase in demand for gold as a safe-haven asset. Inflationary pressures or signs that the Fed may slow down rate cuts could also support higher gold prices.

Geopolitical Events

The ongoing conflict between Israel and Hamas in Gaza remains the most critical geopolitical flashpoint. An escalation could lead to broader regional instability, impacting oil markets and investor sentiment globally. Watch for any developments involving Iran or Hezbollah, as they could dramatically alter the scope of the conflict.

Tensions between the U.S. and China, particularly in the realm of trade and technology, will be an ongoing theme. Any further sanctions or trade barriers, especially related to semiconductors, could affect global markets and the tech sector.

Although it has faded somewhat from daily headlines, the war in Ukraine continues to pose risks to European energy markets, particularly with winter approaching. A disruption in energy supplies, especially natural gas, could reignite fears of an energy crisis in Europe.

The French government's proposed budget, which includes significant spending cuts and tax increases on the wealthy, could lead to political friction. Markets will watch closely to see if Prime Minister Barnier can rally enough support to pass the budget, as the process could impact European equities and the euro.

In summary, the week ahead looks packed with potential market movers, from economic data releases that could shift central bank policy expectations to geopolitical risks that might impact commodity prices and safe-haven assets. Investors will be balancing these elements as they navigate the volatile environment.ome.

In cryptocurrencies, bitcoin gained 5.38% to $62,930.00. Ethereum rose 3.8% to $2,456.70.

"The market is satisfied because there's nothing there that really tells against the narrative that the Fed is cutting; the only debate is how fast they're going to cut," said Steven Englander, head of Global G10 FX Research at Standard Chartered in New York.

"Overall, the data have been slightly encouraging to that narrative and none of the data have been discouraging to the narrative that the Fed is cutting rates."