Sterling moved down from highs against the dollar amid a more cautious market mood this morning, while market participants paid close attention to inflation talks from Bank of England Governor Bailey. Bailey stated the BoE will have to act to ease price pressure in order to keep inflation expectations from becoming entrenched. Hawkishness from the Bank of England has helped GBP better withstand dollar strength recently while it also helped GBPEUR to break through highs last seen in 2018. Despite the hawkish comments from Bailey and other BoE members, however, economists surveyed by Bloomberg expect no rate increase in the Bank of England’s key rate until next year, which is in contrast to signals from money markets where investors bet on the first rate hike occurring in November or December this year. Along with this, economists have trimmed their outlook for UK growth next year by an average of 0.4% to 5.1%, marking the sharpest cut for any major European economy. For the UK, the highlight of the week will be Wednesday’s release of September CPI inflation data. Consensus foresees another 3.2% increase year-on-year.
Today’s market stories around the euro mostly centre around the European Central Bank after President Christine Lagarde again stated she is not worried about inflation as the increase in prices is largely transitory. She added the ECB will pay close attention to wage talks and other potential second-round effects that could prove to be a more permanent driver of prices. The ECB is on a different road to policy normalisation than the Bank of England or the Federal Reserve, and the ECB will likely want to be careful about how it handles communication in December when the central bank will disclose what happens to stimulus after the Pandemic Emergency Purchase Programme (PEPP) expires. In terms of economic data, this week’s calendar is sparse for the eurozone until the release of the purchasing managers’ index figures in the second half of the week. Elsewhere in Europe, tomorrow sees a policy meeting at the central bank of Hungary where another rate hike is expected.
The dollar broadly rebounded this morning as a cautious market mood and rising US bond yields underpinned the greenback. News that China’s Q3 GDP undershot expectations as the country hit its slowest pace of growth in a year helped safe havens stay buoyant this morning while continued concerns around cost pressures and supply chain disruptions kept risk sentiment down. Chinese GDP expanded 4.9% from a year earlier, slowing from 7.9% in the previous quarter. This week’s data calendar is quite light for the US, with purchasing managers’ index figures on Friday being the main data release of note. The PMIs will be interesting for markets this week as many sell-side analysts downgraded their US growth forecasts over the past weeks. Beyond the PMIs, some focus will be on the Fed’s Beige Book on Wednesday evening. Released just eight times a year, the Beige Book will give markets the most up to date assessment of economic conditions, as viewed by the Federal Reserve.
Despite the dip in risk sentiment this morning, oil markets edged up higher with Brent crude briefly touching $86/b to reach highs last seen in 2018 while WTI is trading above $83/b. The continued rally in crude prices helped to keep CAD losses against the US dollar within bounds. At 15:30 BST today, the Bank of Canada releases its Q3 Business Outlook ahead of the October 27 policy meeting which comes with fresh projections. Markets will take the survey as an important indicator of what to expect for next week’s meeting, as strong readings from the outlook could bring forward expectations of the first Bank of Canada rate hike, which is now priced in around six months from now.