The crisis in the Middle East is for now having a muted impact on major currency trading, which continues to be driven primarily by inflation numbers and central bank communications and decisions. The September inflation report out of the US showed signs that the downward trend is stalling, and US rates rebounded, dragging the dollar up with them against most world currencies. The main exception were Latin American currencies, which are continuing to benefit from higher oil prices. Meanwhile, the Polish zloty jumped on Sunday night following results of the elections that were won by the opposition parties that are preferred by the European union. Both the central bank and economic release calendar look rather thin this week. UK labour market data (Tuesday) and inflation (Wednesday), and inflation out of Japan (Friday) will provide the main points of focus for G10 currencies. Speeches by central bank officials from the Federal Reserve, the European Central Bank and the Bank of England may also provide some much-needed insight on central bank thinking this week.


Last week was largely void of any market-moving news out of the UK, aside from the monthly GDP data, where the July number was revised downwards and deeper into contraction. This presents a difficult balancing act for Bank of England officials. Communications from MPC members were rather vague last week, although Governor Bailey and chief economist Pill both kept the door open to additional policy tightening, noting that upcoming decisions would be finely balanced. This week we will get a wealth of economic data and insight on the Bank of England’s views. Labour market data Tuesday will set the stage for the critical inflation report on Wednesday. Market pricing of the terminal rate in the UK has shifted dramatically on the assumption that a disinflationary trend is now firmly in place. Any disappointment on this score, particularly as regards to core inflation, could lead to a sharp repricing of future Bank of England moves and buoy the pound.


The main news out of the Eurozone last week was yet another dismal industrial production report for August, which showed a sharp contraction. This will do little to dispel the narrative of European stagflation, as output stalls and inflation falls back at a slow pace. The accounts from the latest ECB meeting also struck a rather dovish tone, noting that the September rate hike was a ‘close call’ and that there was inconclusive evidence to suggest whether further policy tightening is required. All in all, this is not exactly the type of communication that would suggest rate-setters are open to additional hikes. The euro held up well in spite of the gloom, ending the week nearly flat against the dollar. This would seem to validate our view that current levels price in a very negative scenario for the Eurozone, and that any positive surprises could have a disproportionate effect on the common currency.


The critical September inflation report was noisy, but overall, it provided little comfort to the Federal Reserve. A variety of core services pricing indicators firmed up, the kind of sticky inflation that had shown tentative signs of being clearly on the way down. Our favoured barometer, the three-month annualised core rate of inflation, has also edged back up again, which is a bit of a worry. Following the data, yields backed up, in spite of the turmoil in the Middle East and the consequent flight to safety, which is generally supportive of the US dollar. This positive effect was somewhat compensated by a general sense among Fed officials that the recent backup in long-term rates had tightened financial conditions and done some of the work for the central bank, reducing the need for additional hikes. FOMC members Bostic, Jefferson and Logan all indicated that they believed the hiking cycle was over and, by the end of the week, futures were back assigning only around a 1-in-3 implied probability that the Fed raises rates by another 25 basis points by year-end.