USD retreating, UK rate hike imminent & China slowing down
As the USD retreats after 3weeks of strength, the key 10yr yield peaked at 1.627% yesterday, but ended at 1.58%. EUR/USD climbed to 1.1650 on this weakness, and GBP/USD sits near 1.3760
There is a light data calendar this week, but all eyes will be on the UK Inflation data released tomorrow morning, as the market expects interest rate hikes to be pulled forward to combat across-the-board inflationary pressures.
UK: Goldman Sachs economists predict three rate hikes at alternate meetings from next month (November), taking BOE’s benchmark rate to 0.75% by May, before a move to 1% by the end of next year, per Bloomberg. This view is shared by Standard Chartered Bank overnight.
Below are some key quotes, and this CNBC link summarises a few issues facing the UK:
CNBC: Gas crisis, labour shortages and supply chain chaos
"I continue to believe that higher inflation will be temporary because it is in the nature of the underlying causes.”
“But the energy story particularly means that it will last longer and it will, of course, get into the annual numbers for longer as a consequence of that.”
“And that, of course, raises for central banks the fear and concern of embedded inflation expectations.”
“As I've said before, monetary policy cannot solve supply-side problems, but it will have to act and must do so if we see a risk particularly to medium-term inflation and to medium-term inflation expectations, and that is why we at the Bank have signalled - and this is another such signal - that we will have to act.”
AUD: The RBA’s October meeting Minutes have stated that the inflation target of 2-3% that is required before the central bank will lift the cash rate will not be until 2024. AUD/USD is giving back short-term gains because the market was pricing in some rate hikes in 2022, which now seem too aggressive.
The Delta variant of covid-19 had interrupted the recovery of the Australian economy
In the central scenario, the economy would return to growth in the December quarter and to its pre-delta path in the second half of 2022.
China: Weak growth figures yesterday (GDP at 4.9% vs expected 5.2%). The numbers look high, but when we compare to the previous quarter at 8%, the extent of the downturn is clear. Power outages, weather-related disasters and state-applied pressure on some industries, along with Covid-19 restrictions have taken their tool on the global powerhouse.
The week ahead:
Wednesday: UK Inflation data/ China interest rate decision / EU Inflation data / CAD Inflation data
Thursday: EU Council meeting all day long / AUD Central Bank Governor speech
Friday: German, EU and UK manufacturing data / UK Retail Sales data
GBP/EUR 1.1820
GBP/USD 1.3760
EUR/USD 1.1650
EUR/CAD 1.4350
GBP/AUD 1.8450
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The RedFX Team