21 October 2024

GBP

Last Wednesday’s UK inflation report showed that inflation has slipped below the Bank of England’s 2% target for the first time in three and a half years. Core inflation also fell below the forecast 3.4% to 3.2%, while service inflation decreased from 5.6% to 4.9%.

UK consumer price rises dropped to 1.7% in September, compared to 2.2% a year earlier, however retail sales volumes grew unexpectedly by 0.3% for a third consecutive month, marking the highest sales volume since July 2022.

In reaction to this positive news, markets are now fully pricing in a 25 basis point rate cut at the Bank of England’s next meeting on 7 November, and forecast a 70% probability of a second cut in December.

At 2:25pm (BST) on Tuesday, the BoE Governor Andrew Bailey will speak at the Bloomberg Global Regulatory Forum before taking part in a moderated discussion at the Annual Meetings of the International Monetary Fund and the World Bank Group on Wednesday at 9:30pm (BST).

UK PMI data is out at 9:30am (BST) Thursday, with both Flash Manufacturing PMI and Flash Services PMI expected to be 51.5 and 52.3 respectively. Both figures show expansion, and are almost exactly in line with last month’s figures. Thursday also sees the latest Monetary Policy Report Hearings.

EUR

Last week, the ECB cut rates for the third time this year by 25 basis points, bringing the deposit facility rate down to 3.25%.

Some policymakers, who anticipate inflation stabilising at the ECB’s 2% target earlier than expected, argued for dropping a long-standing pledge to keep borrowing costs "sufficiently restrictive for as long as necessary". But the President of the European Central Bank, Christine Lagarde, pointed towards greater downside risks than upside, and once again forecasted inflation would “rise in the coming months, before declining to target in the course of next year.”

Market expectations are now for the European Central Bank to cut interest rates in all of its next four meetings, suggesting that the deposit facility rate will be as low as 2% by July next year.

Lagarde will speak this week at the Annual Meetings of the International Monetary Fund and the World Bank Group on Tuesday at 8.15pm (BST), and then about Europe's financial challenges at the Atlantic Council on Wednesday at 3pm (BST).

European PMIs are out on Thursday morning. French Flash Manufacturing PMI is expected to be 45.1 and French Flash Services PMI 49.9. German Flash Manufacturing PMI is predicted to be 40.7, German Flash Services PMI 50.6,  Eurozone Flash Manufacturing PMI 45.1, and Eurozone Flash Services PMI 51.5.

USD

With the US presidential election taking place two weeks from tomorrow, the race between Kamala Harris and Donald Trump remains in a deadlock. Although the seven crucial swing states are almost split down the middle, Trump has overtaken Harris in both Michigan and Pennsylvania with the narrowest of margins.

In The Guardian’s most recent 10-day poll tracker, Harris is ahead nationwide by just two points, 48% to 46%. These figures are unchanged from a week before, and represent a significantly tighter margin than the 4% lead Harris was enjoying several weeks ago. Such uncertainty is keeping the markets on edge.

Last week’s US Retail Sales data showed a 0.4% rise against expectations of 0.3%, while Unemployment Claims matched the predicted figure of 241K. Forecasters expect claims to rise slightly to 243K later this week.

The next release of the Federal Reserve’s Beige book is published on Wednesday. Nine of the 12 districts reported flat or falling economic activity in their September releases.

On Thursday, US Flash Manufacturing and Services PMIs will be released at an expected 47.5 and 55.0 respectively.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.