Currency market volatility continues to rise, and signs are emerging that the dollar rally is running out of steam. The Federal Reserve delivered a massive hike and a more hawkish than expected message, while other central banks begin to fret about the impact of higher rates on their respective economies. However, the dollar failed to rally and in fact fell against most G10 currencies, with the notable exception of sterling, which was hobbled by an uber-dovish Bank of England. The star of the week, and also the year so far, was undoubtedly the Brazilian real, a favourite of ours, which put in another scorching rally on the back of the peaceful transfer of power to what looks to be a moderate Lula administration.

All eyes turn now to the critical October CPI inflation report out of the US (Thursday). Headline prices will probably drop further as energy prices continue to moderate, but the key will be once again the more persistent core rate. UK third-quarter GDP growth (Friday) may be important for sterling. Beyond economic news, it will be important to see whether signs of China easing its COVID policies are confirmed. As this is written, signs are emerging that last week’s rally in Chinese assets may have been premature.


The Bank of England hiked rates by 75 basis points last Thursday as expected, but then surprised markets with one of its periodic pivots, this time a dovish one. The Bank of England appears to be taking a blasé view of inflation and focusing on recessionary risks instead. The reference to markets overestimating the terminal rate was unusually blunt, and sterling did not like it one bit, losing significant ground against every major currency worldwide. Third-quarter GDP growth data will be in focus this week. The MPC warned last week that the UK economy may already be in a recession, and this week data is indeed expected to show that contraction on a quarterly basis. This is, however, a backward-looking number, and we expect sterling to react as much or more to the US inflation data out this week.


Another month, another blow out inflation report out of the Eurozone. This one came just a few days after the muddled attempt at a dovish pivot from the ECB at its meeting the previous week, thereby contributing to the developing credibility gap at the institution. In addition to double digit headline inflation, sticky core inflation continues to march higher.

On the plus side, the worst fears about a winter energy crisis continue to fade. On the negative side, early Monday morning reports from Asia suggest that hopes for an easing of Chinese lockdowns may have been premature, and hence the recovery of European exports to China may be further delayed. This week’s main event in the Eurozone will be a number of ECB official speeches, including President Lagarde.


The hopes for a Federal Reserve pivot to a more dovish stance failed to materialise last week, and in fact Chair Powell indicated that rates may have to go even higher than markets were pricing in before the meeting. Bonds fell, as did stocks, but the dollar failed to follow the script and actually ended the week slightly down in trade-weighted terms following Friday’s nonfarm payrolls data. The labour market report was mixed, but still consistent with a very tight market that is yet to feel the impact of monetary tightening in any significant way. The inflation report this week is expected to show another easing of headline annual price pressures on the back of lower energy costs. However, the key will be the core index that strips out the volatile food and energy components. The Fed needs to see a downward trend in these numbers before it can think of pausing hikes in interest rates and is unlikely to see that in this report.