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Energy continued to impact exchange rates to start the week.
A quiet day for currencies saw the US dollar continue to dominate the pound and the euro. Sterling strengthened against the euro on Monday but the recent divide between European currencies and the performance of the dollar has been stark.
Part of that strength comes from the complex energy picture. Ukraine’s President Volodymyr Zelenskyy accused Moscow of breaking Doanld Trump’s claimed energy ceasefire, adding that his country would only call off strikes on Russian infrastructure once those on its own facilities had stopped. Oil climbed towards a two-week high after Houthi attacks on Saudi Arabia further muddied the waters.
With little in the way of data due today, central bankers will be in the spotlight. The Bank of England’s Megan Greene is speaking at the IMF and World Bank meetings, while Christopher Waller and Thomas Barkin are among the Federal Reserve officials appearing later. Their comments will be watched for signs that recent expectations of higher interest rates have run too far, or perhaps not far enough.
The initial news from the meetings was mixed for the global economies. The largest economies are headed for the largest spending deficits since the pandemic, although the latest world economic outlook (published today) included a significant upgrade in its growth forecast for the UK economy.
Final German inflation figures provide today’s main eurozone release and are expected to confirm another sharp rise in energy costs. Attention then turns to Wednesday’s US inflation report and Thursday’s UK gross domestic product (GDP) figures, which could provide a clearer test of the interest-rate expectations currently supporting the pound and dollar.
GBP: IFS warns Chancellor over headroom
The Institute of Fiscal Studies (IFS) issued the chancellor a stark warning ahead of the autumn Budget (28 October). According to the IFS, John Healey cannot afford to announce a Budget that muddles through without real change to either spending or taxation. Failing to address the shrunken headroom would risk a negative market reaction that could see the pound come under significant pressure.GBP/USD: the past year
EUR: Inflation offers little comfort
France’s budget debate begins today, marking the next chapter in what has fast become the most significant driver for the euro. Meanwhile, final German inflation figures are expected to confirm another acceleration in price growth. That combination of fiscal uncertainty and expensive energy leaves the eurozone facing an uncomfortable mix of weak confidence and persistent inflation.GBP/EUR: the past year
USD: Strong ahead of Fed speakers
The US dollar clung on to its recent highs as markets continued to favour the stronger US growth story. Expectations of further Federal Reserve tightening have also provided support, although policymakers have indicated that any additional increases are likely to be gradual. Several officials speak today, but Wednesday’s inflation report could be even more significant.USD/GBP: the past year
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