Daily Market Report - 25/10/22

UK welcomes another new PM, ECB rate decision looms

Rishi Sunak is set to be named 3rd Prime Minister today, making him the 3rd prime minister in 60 days. Sunak will meet King Charles today, to be invited to form a government after Liz Truss ends her briefest of reigns at the top of the UK government. Truss had pursued a dash for growth with a radical tax-cutting “mini-budget” that resulted in financial market chaos and her resignation in less than two months.

Yesterday, the prospect of former chancellor Rishi Sunak taking the reins was welcomed by markets, pushing the pound up 0.4% against the US dollar to $1.13 and 0.6% against the euro to around €1.15. UK bond markets have also calmed in recent days, and yields have cooled, sitting at around 4% for both 10-year and 30-year gilts.

The boss of Britain’s largest business lobby group has warned incoming prime minister Rishi Sunak against pursuing an austerity “doom loop” which he said could lead to a repeat of the weak economic growth since the financial crisis. Tony Danker, head of the Confederation of British Industry (CBI), said that Sunak would have to look at policies such as planning reform or liberalising immigration that might be unpopular with the Conservative party’s members.

Furthermore, Bank of England Deputy Governor Dave Ramsden said credibility was returning to British economic policymaking, judging by a recovery in the government bond market.

The downbeat UK activity numbers and mixed concerns over the Bank of England’s (BOE) next move, now that Truss-led pressure is off, appear to challenge the GBP/USD bulls. On the same line could be the hawkish Fed bets and the strong US inflation expectations.

GBP/USD buyers need strong positives to overcome the immediate key hurdle and reverse the previous downtrend. However, the absence of Fedspeak and a light calendar may restrict the Cable pair’s moves ahead of Thursday’s US Gross Domestic Product for the third quarter (Q3).

Focus this week will be on the European Central Bank's policy meeting where it is likely to hike interest rates by another 75 basis points as it tries to contain inflation running at five times its target.

The U.S. dollar has eased against peers this morning, amid signs Federal Reserve rate hikes are already putting the brakes on the world’s biggest economy, while risk sentiment improved with Rishi Sunak about to become Britain’s prime minister.

Meanwhile, the S&P flash PMI data overnight showed U.S. business activity contracting for a fourth straight month in October, the latest evidence of an economy slowing in the face of high inflation and rising interest rates, which shows the Feds monetary policy strategy was working. It is now widely anticipated the pace of rate increases will slow to 50 basis points in December, as priced in by money markets currently.

EUR/USD slipped 0.2% to 0.9856 ahead of the release of the latest guide to business sentiment in the German economy, the largest and most important in the Eurozone. The German Ifo business climate indicator is expected to fall to 83.3 in October, from 84.3, as high energy prices continue to weigh, likely dragging the German economy into recession next year.

Economic Calendar Highlights:

- Interest Rate decision - Bank of Canada - 26.10.2022

- Interest Rate decision - ECB - 27.10.2022

- US Umemployment Claims - US Department of Labour - 27.10.2022

- Gross Domestic Product - Bureuau of Economic Analysis - 27.10.2022

- Consumer Confidence EU - Eurostat - 28.10.2022

- CPI Inflation Germany - Destatis - 28.10.2022

- Consumer Sentiment Survey US - University of Michigan - 28.10.2022

For further information, please get in touch with our team on 020 3950 4132

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Daily Market Report - 09/08/22