Hawkish BoE Helps Sterling Recover

GBP

The pound has had a good start to October recovering by 1.6% versus the dollar and 2% against the euro. This rally has been fuelled by the recent reactions from central bankers to rising inflation rates with the Bank of England being seen as the first to raise rates. This was further backed up by the BoE’s chief Economist Huw Pill making comments that higher prices will have a more persistent nature than previously thought. Sterling was also helped by the settling of natural gas prices towards the end of the week as well as a rally in the equities market.

The pound faces a busy week in terms of the economic calendar with the jobs report on Tuesday and GDP on Wednesday. The unemployment rate is expected to tick down slightly from 4.6% to 4.5%. GDP is expected to increase from 0.1% to 0.5% which should reassure investors that UK economy is steering away from a recession. There are also speeches from some of the MPC’s most dovish members which will shed some light on whether there has been a shift from all the policy makers towards raising rates. The Northern Ireland protocol will be back in the headlines this week as the UK & EU try to make adjustments to the legislation. The Irish foreign minister Simon Coveney has warned that the UK demand could cause a breakdown in relations with the EU and add some risk for the pound going into this week.

USD

The main headline for the dollar last week was non-farm payrolls on Friday which fell very short of expectations. The US economy only created 194K jobs in September versus an expected number of 500K but with 11 million vacancies in the US it shows that it a supply problem and not demand related. The details show private payrolls rose 317k while the number of government workers fell 123k, which is a major surprise and surely will be reversed at some point. In terms of the dollar, the miss has done little to affect the Fed tapering expectations or slow down the strength of the dollar.

Inflation will yet again be the key talking point for the dollar this week with US CPI released on Wednesday. The year-on-year number is expected to match the previous reading of 4% which is slightly down from the recent peak in July at 4.5%. The energy crisis seems to be having a minimal effect on the US so far due to their energy independence, especially compared to economies such as Japan who are heavy energy importers. Wednesday will also see the release of the latest FOMC minutes which is expected to be hawkish like much of the recent communication from the Fed. Friday will see the release of Retail sales, expected to retract from the precious reading of 0.7% to -0.2%.

EUR

The euro fell by 0.6% versus the dollar last week as the euro continues to struggle due to the difference in forward guidance between the ECB and Fed. Christine Lagarde still believes that inflation will be transitionary and this was backed up on Thursday by the ECB Chief economist Philip Lane said there is “very solid evidence” to believe the current spike in prices will not last. The ECB look to join the bank of Japan as the only G10 central banks who aren’t looking to raise rates in the near future.

There are several speeches from Phillip Lane this week, but these will be used to back up his recent comments on the transitory nature of inflation. The Euro is likely to struggle this week especially against the dollar as investors continue to price in changes to central bank’s base rates. The only real data of note from the eurozone this week is released on Wednesday with Harmonized Index of Consumer Prices (YoY) for September out of Germany. As Europe’s largest economy, Germany’s inflation makes has the highest impact on Europe’s inflation as a whole.