Big week for sterling

Jeremy Thomson-Cook
Jeremy Thomson-Cook 01 November 2021

GBP: Jobs versus inflation

EUR: Changes are not afoot

USD: US numbers should boost dollar

 

Sterling

Despite sterling being priced for an increase in interest rates by the Bank of England on Thursday, the pound is in reverse this morning. As we have noted for a while and highlighted in our webinar on the Budget last week, while expectations for a short-term hike may be met if the future path of rate hikes that has been priced in is dismissed by the Bank or even simply cast into doubt, then the pound will weaken.

I still have my doubts over whether the Bank of England will increase interest rates on Thursday and may just stand pat waiting on the news from the UK jobs market following the end of the furlough scheme. That will be available before the Bank’s December meeting.

We do think that the Bank calls to an end the QE program on Thursday which in itself is a signal that the Bank sees the UK economy getting back to normal, but without a rate hike sterling doesn’t really stand a chance of moving higher.

 

Euro

Expectations for the next year in the Eurozone were a mess heading into the European Central Bank meeting and they are a mess after it. The belief remains that the European Central Bank will be in a position to raise interest rates by 20bps by the end of next year but, for us, that seems very foolhardy.

Needless to say the market may be betting on it – yields on Greek and Italian debt in particular rose well on Friday – but those bets may actually make the chances of it happening even less likely. The ECB wants solid financing conditions not volatile ones after all.

With this in mind and heading into the Fed meeting on Wednesday we expect more pressure to be put on the euro into the end of the year.

 

US dollar

Inflation and GDP numbers from the US economy last week are enough for us to call for a confident beginning to the tapering of stimulus by the Federal Reserve and a path to higher interest rates soon.

As it is the first day of the month, the US manufacturing ISM will be released at 2pm UK time and this is the piece of data that continues to tell a story of supply chain delays through high prices, longer backlogs for orders, strong order books and diminished inventories.

I expect this to be a strong week for the USD.

 

Elsewhere

The AUD will be front and centre in the coming 24hrs after a busy week for Australian debt markets. The Reserve Bank of Australia’s policy of explicitly targeting a yield on its 2-year bond may be over and this could lead to a substantial catch up in the value of the AUD.

The meeting announcement takes place at 3.30 AM GMT.

 

Market rates

Today's Interbank Rates at 08:48am against sterling movement vs yesterday.

Euro €1.157 ↓
US dollar $1.366 ↑
Australian dollar $1.822 ↓
South African rand R20.96 ↑
Japanese yen ¥156.3 ↑

 

Have a great day.