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Market Update

• Posted by currencies in Bank of England, Currency, Dollar, EUR, Fed, GBP, Inflation, Rate Cuts, Rate Hikes, Sterling, UK, Uncategorised
• October 26, 2023
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Australia’s inflation yesterday has shown signs of a continued struggle to drop quick enough, with inflation mainly boosted by higher petrol prices, adding further fuel to the Interest Rate question for The Reserve Bank of Australia. So far, The RBA have left their rates unchanged at 4.1% for the past four months, but prior to the inflation release, markets were pricing in a one-in-three chance that rates would be raised to 4.35% in their next meeting on the 7^th November. The situation in Australia could be worth keeping an eye on, as higher fuel prices could be something experienced all over and therefore also potentially leading to other Central Banks raising rates again.

Staying on the interest rate focus, The Bank of Canada kept their Interest Rates on hold at 5%, however they effectively kept the door open for further rate hikes due to inflationary risks having increased since July and therefore being on a higher path than expected. It was mentioned that rates were left unchanged to allow the monetary policy time to cool the economy and relieve price pressure.

Later today see’s The European Central Bank release their interest rate decision, with expectations suggesting a pause later today is almost fully priced in. We could still see Euro strength however, which will be further bad news for Pound Sterling, because The European Central Bank may well be hawkish with their guidance showing intent to raise rates again in December. The Euro has strengthen against Sterling by over 2.5% since it’s lows in July, and there could be further room for GBP/EUR to slide off the back of their guidance.

The main story of this morning is continued USD dominance on the markets with GBP/USD dropping back below 1.21, EUR/USD back below 1.06 and USD/JPY back above 1.50. Rising US Bond Yields, a resilient economy and rising Oil prices have led to the aggressive USD performance. Oil prices in particular have risen by over One Percent overnight following reported news that Israel is set to invade The Gaza strip. Further price pressures on Oil have also come from growing speculation of Iran becoming involved and potentially leading to Oil supply disruptions.

Following USD/JPY breaching 1.50, that’s the second time this month the pair has breached that level, ramping up bets that The Japanese government will intervene in currency markets to stem further weakness. Weakness in The Yen, coupled with a spike in Japanese government yields have strengthened speculation that The Bank of Japan will further adjust its yield curve control policy when they meet next Tuesday.