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GBP
The pound was one of the most notable currencies in yesterday’s trading session as a breakout in EURGBP below recent lows triggered widespread sterling buying, which pushed GBPUSD close to half a percentage point higher at one point in the session. However, sterling’s gains weren’t to last until the market close as downside momentum in EURGBP proved weak once it broke the key support level. Today, the pound remains trading in tight ranges as a key fiscal event, the Autumn budget, is on the horizon. Shortly after midday, Rishi Sunak, the Chancellor of the Exchequer, is expected to outline a more conservative fiscal package with much of the recently reported spending paid for by the recent fiscal windfall. If media reports are to be true, £6bn has already been earmarked for the NHS, £7bn for transport schemes in large cities outside of London, and a 6.6% rise in the national living wage. The Chancellor has already hit the wires to outline why all of the fiscal headroom can’t be allocated to additional spending, largely due to the increase in financing costs once interest rates and inflation start to rise, but many see the hawkish fiscal position as one which is preparing to cut taxes ahead of the 2024 election. Regardless, with the Bank of England set to battle the latest rise in inflation over the coming months and QE set to end, the level of fiscal support offered by Sunak today will be instrumental for economic forecast adjustments.
EUR
The euro continued to be a laggard on the G10 currency board as the currency posted fresh weekly lows against the strengthening dollar yesterday afternoon. Macro news has been deteriorating in the eurozone with surges in Covid cases, talks of renewed restrictions and declines in several sentiment indicators ahead of Friday’s GDP release, which is not helping the currency either. This contrasts with better Covid-19 data from the US in Q3, which was reflected in US confidence indicators as well. The European Central Bank released its Bank Lending Survey yesterday, which showed the bar was raised for households looking for a mortgage. Eurozone banks tightened access to mortgages in the three months to September and expect to continue doing so in the final quarter of the year, the survey showed. Approval criteria for mortgages were tightened in Germany, Spain and France, which led to higher rejection rates in those countries as this was combined with rising demand. Tighter financial conditions, as highlighted by stricter mortgage access, will likely be a topic at Thursday’s ECB meeting, where President Lagarde will also be examined on the expiration of PEPP and the recent downturn in economic activity. This morning’s data calendar included mixed data from the eurozone, with German consumer confidence exceeding expectations while French consumer confidence declined in October.
USD
The dollar pared back gains overnight with US 10-year yields also remaining at lower levels after yesterday’s afternoon session saw the greenback post a turnaround on the back of a downturn in risk sentiment. The risk-off mood came as China Evergrande fears and US-China tensions re-emerged. The US Federal Communications Commission decided on Tuesday to cancel permission to operate in the US for the unit of China Telecom, one of three leading communications providers in China. The ban by the regulators signals an escalation of tensions between the two nations and sends a broader message to Beijing. For today, markets turn to US durable goods orders from September at 13:30 BST, which is one of the last economic indicators ahead of next week’s Fed meeting.
CAD
The loonies’ tight ranges are likely to be broken today as the Bank of Canada updates investors with its latest policy decision and economic outlook. While we expect larger moves in USDCAD relative to other trading sessions this week, the loonies’ slight depreciation trend may not reverse should the Bank not accompany the end to their QE programme with a more hawkish outlook for rate hikes. Notably, market participants will be watching for any adjustment to the Bank’s assessment of when the output gap is set to close, with their July projections suggesting H2 2022. The statement and economic projections at 15:00 BST won’t be the only thing in focus, with Governor Macklem hitting the wires shortly after. Macklem’s tone will likely have a lot of weight when it comes to market price action, especially in terms of alleviating concerns over the slip in Q2 economic activity and the potential for slower than expected growth in Q3.