Weekly Forex Report 17-Oct-2022: GBP was a relative winner in what was another volatile week

GBP remains the currency to watch this week, for fans of extra volatility

The pound was a relative winner in what was another volatile week, as it wiggled up further away from the record lows set in the wake of the calamitous ‘mini budget’ late last month.

Political repercussions are still rumbling and the currency markets have been keeping a sceptical eye on Westminster ever since, with the past week seeing Prime Minister Liz Truss sack her chancellor Kwasi Kwarteng and make another U-turn on taxes, which was meant to reassure the market.

This helped pare losses against the euro and the dollar, with EURGBP finishing last week down around a penny, while GBP/USD started week at 1.108, fell to 1.092 and then rallied to as high as 1.1375 before dropping on Friday against a resurgent dollar.

But for most of the week the dollar index was roughly flat, trundling sideways along the 113 mark until new US inflation figures emerged on Thursday.

A 40-year high in the core consumer price index sent currency, equity and bond markets crazy for a few hours before, like a toddler tantrum, they burned themselves out and ended up not far from where they started.

In fact, on Friday alone the greenback climbed over 1% against GBP, AUD and NZD, 0.9% versus JPY, 0.8% against the CAD and 0.4% versus EUR.

Over the week, its biggest gains were over 2% advances versus JPY and AUD.

The Japanese yen was a big G10 loser of the week, under depreciation pressure as the Bank of Japan struggles to have impact with its market intervention.

The week ahead

Amid some extra self-imposed political and market turmoil, the pound remains a currency to watch this week, for fans of extra volatility.

While Bank of England policy has been driving currency moves earlier in the year, it has been the government's fiscal policy that has spooked markets in recent weeks, with a new chancellor in place unveiling measures that are also aimed at giving some supporting to GBP.

The big macro data in the diary is UK inflation data Wednesday, with economists expecting to see an increase for September’s figures back into double digits at around 10%.

A month ago, the consumer prices index for August was shown to be up 9.9% compared to year earlier, down from the 40-year high reading of 10.1% in July. Core CPI, which excludes food and fuel, was 6.3% and is forecast to climb to 6.4%.

Other UK data includes GfK consumer confidence released ahead of Friday morning, expected to show a new low, and public sector borrowing figures, both of which could jiggle GBP.

China may dominate the headlines, with implications for global growth and for several other currencies, as Xi Jinping was confirmed on Sunday as starting a third five-year term at the Communist Party’s national congress, and with the People’s Republic following that with some big data releases through the week, including third-quarter GDP and other industrial activity reports on Tuesday.

The Japanese yen will also be in focus amid more expected central bank intervention and encouraging industrial data on Monday, to be followed by inflation numbers out later in the week for September.

For the USD, jobless numbers on Thursday will be closely watched, with the AUD in the spotlight earlier that day as Australian jobs figures are also out.

Recent job and inflation readings have cemented expectations of a fourth consecutive 0.75 percentage-point hike from the Federal Reserve at its next meeting on 2 November, and raised the chances of a fifth in December.

Some USD-watchers expect the US housing market to be a big factor in this, with US home sales numbers also due on Thursday to give a bead on this.

As for Australia, firm labour stats might make it awkward for the RBA, which scaled back the pace of its rate hikes at the October meeting, though we are just over a week away from new inflation data.

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