As we close out the third quarter, the focus remains on the future path of inflation and interest rates. Within bond markets, the rise over this quarter has been significant. With central banks close to the end of their hiking cycles, it would be typical to see longer-dated interest rates fall. The fact that bonds are moving higher, suggests concern that interest rates may stay higher for longer. The recent rise in oil prices, close to $100, has added to concerns around inflation amid weakening growth.
This week, we have little additional data to add to the picture. The September PMI data for manufacturing and services are second readings and will only provide an update. The construction PMI will be new information and will give an indication of how far below 50 the composite will be. This suggests weakening output for the second month in a row. We will also see the BRC shop price index, which will give an indication of September inflation. The BoE Decision Makers Panel survey will assess further data on inflation and whether expectations are likely to fall further.
GBPUSD – 1.2064
GBPEUR – 1.1527
Last week ended with Eurozone inflation falling more than expected to 4.3% in September from 5.2% in August. This will reinforce expectations that interest rates may have peaked. As in the UK, we will see second readings for the weak September PMI data. This is likely to reinforce the original readings, that growth has turned negative according to these readings. Along with UK readings below 50, the Chinese PMI readings over the weekend managed to remain only slightly above 50 as growth globally grinds lower. Unemployment remains low at 6.4%, but elsewhere data continues to point towards weakness, with retail sales tomorrow expected to show a fall.
Given the weakness in Europe (and the UK), the US dollar has been up substantially over September against the euro. The dollar reached a new high for the year last week and the euro continues to look under pressure against the greenback.
EURUSD – 1.0466
EURGBP – 0.8675
Over the weekend, the focus was on the potential implications of a US federal government shutdown. This was narrowly avoided as we started the new fiscal year on 1st October. A number of concessions were made including questions around the level of funding that will continue to support Ukraine in their war efforts. This week, we will have the September US labour market report. It is always seen as a bellwether of US economic conditions. The report this week may be seen as particularly important as it could be a key input into
Federal Reserve policymakers’ decision on whether or not to hike interest rates in November. Markets expect a solid report which could give the more Hawkish members of the Fed something to think about. Overall, payrolls are likely to rise by close to 200,000. The unemployment rate may fall back to 3.6% following the unexpected rise last month to 3.8%. Wage growth will also be watched closely to see whether it accelerated further.
GBPUSD – 1.2064
EURUSD – 1.0466
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*Interbank rates are correct at 7am on the date of publishing.