The past week has been volatile again with concerns about rising inflation and weakening growth. They are both linked to supply-side disruptions stemming from the pandemic. Current disruption in UK petrol supply is an example and latest updates on delivery issues will be closely watched. The government’s furlough scheme ended, though it will take some time for the impact to show up in official data.
The pound at one point slipped to its lowest level of the year against the greenback despite the support provided by rising interest rate expectations. However, after an early wobble it seems to be ending the week little changed against the euro.
UK gilt yields have risen strongly with 10-year yields above 1% for the first time since May 2019. Markets are now pricing in 60 basis points of interest rate hikes by the end of 2022. This is despite uncertainties around the growth outlook. For the second quarter, GDP was revised up to 5.5% growth from 4.8%. This week, Construction PMI may show up some of the supply disruption with a weaker print.
GBPEUR – 1.1674
GBPUSD – 1.3540
Eurozone yields also rose last week as inflation continues to rise persistently. Euro area inflation hit a new 10-year high of 3.4% for September. Although the European Central Bank continues to talk about transitory inflation, it is a matter of time before they have to start following the other major central banks and thinking about policy action.
This week, Eurozone PMI services is a final reading and unlikely to create any major surprises. In the meantime, the Euro fell against the dollar as safe haven plays and interest rate expectations favoured the US currency.
EURUSD – 1.1598
EURGBP – 0.8566
Friday’s US labour market report always attracts a lot of attention and is the only employment report before the next Fed meeting. Fed Chair Powell has said that even moderate employment growth would lead to a tapering announcement at the November meeting. Markets expect a rise of around 500k. A further decline in the unemployment rate is also expected to 5.0%.
An announcement on tapering of its asset purchases at the 3rd November Fed meeting is fully priced in by the markets. There is also an increasing expectation of a Fed rate hike in 2022. The employment report would need to be very weak to push back a November tapering announcement.
With increased expectations of tapering of asset purchases and increases in interest rates, the US dollar has benefitted strongly. US Treasury yields are up significantly over the past month which has supported the broad-based US dollar appreciation.
GBPUSD – 1.3540
EURUSD – 1.1598
Do get in touch if you would like to discuss further.
*Interbank rates correct at 7 am on the date of publishing.
