Sterling on the front foot

Sterling gained ground against the euro and dollar yesterday, supported by stronger than expected labour market data in the UK. Similarly, a firmer than forecast CPI inflation report for September released a short while ago is helping to underpin the pound this morning. This sees it trading at around £0.8390 against the single currency, its strongest level in about sixteen months, and at around $1.3380 versus the dollar, the best part of cent higher from earlier in the week. The euro got up to an intra-day high of circa $1.1260 against the US currency during the course of yesterday’s session, but it has since come back to trade at around $1.1225 this morning.

Government bond yields were mainly flat to lower across the main markets, with the long-end of the curve outperforming amid an easing in oil prices (the latter since largely reversed). French 10-year yields fell slightly on the day, though they still underperformed equivalent German bonds, with the spread widening out by another 5bps or so to over 150bps. It was a mixed session for equity markets, with US stocks closing with small gains but European stocks ending with small losses. Asian markets were generally in the black overnight, while Meta announces earnings results after today’s US close.

Annual CPI inflation in the UK picked up to 3.5% in September according to this morning’s release, from 3.1% in August, driven by rising energy price inflation and an uptick in core inflation (which excludes energy and food prices). The latter rose to 2.8% from 2.6% in August, with core goods inflation increasing to 1% (from 0.9%) and core services inflation rising to 3.7% (from 3.4%). Headline inflation is set to rise further over the coming months, with the Bank of England expecting it to be north of 4% in the first quarter of 2027. Following the latest inflation and labour market data, the market is fully pricing in a 25bps rate hike at next month’s BoE meeting.

Bank of England MPC member Greene, who has been voting for a hike in rates at recent meetings, says the “(UK) economy has proved surprisingly resilient”, while “slack in the labour market…may have peaked”. This in turn suggests “there is a greater risk of second-round effects emerging” (from the energy price shock), which she says the MPC should “lean against” by raising interest rates.

For the day ahead, it is extremely quiet on the economic data front with little or nothing of note scheduled for release. We are due to hear from a few central bank members over the course of the day, including BoE’s Bailey.