UK in the spotlight

Sterling remains under pressure, falling sharply – to as low as $1.04 during yesterday’s trading – but speculation about a emergency interest rate hike by the Bank of England helped a bounce back to $1.09 but the currency came under renewed pressure and fell back once again – and is now around $1.07 – when the BoE statement yesterday indicated no immediate action was imminent. Sterling took a similar volatile route versus the euro which now trades at c. 89p. Against the dollar, the single currency is trading around $0.96

The statement from the Bank of England failed to calm financial markets as sterling slid and gilt yields rose.  Governor Bailey said that it is was monitoring market developments ‘very closely’ and the BoE ‘will not hesitate to change interest rates by as much as needed to return inflation to the 2% target’ but that it will make a ‘full assessment’ at the next MPC meeting in November, quashing rumors of a move yesterday. The Treasury also issued a statement, within minutes of the BOE announcement, promising a medium-term fiscal plan on November 23rd alongside updated forecasts from the Office of Budget Responsibility

Bond yields increased globally led by the UK rates as markets priced in ultimately higher rates by the BOE amid fears about the UK’s fiscal outlook.  10-year UK yields rose by more than 40bps to over 4.2% (though UK yields are a little lower on the open this morning), the highest since 2011. US 10-year yields rose over 20bps to 3.9% while 10-year German yields were up 9bps to 2.1%

The OECD published an updated world economic outlook and again cut the global growth outlook. The OECD now see GDP growth of 3.0% this year (from 5.8% in 2021) and down to 2.2% in 2023. This is well below the pace of economic growth projected before the war in the Ukraine began. The report also noted that inflation should ease but remain at a high level, well above central bank targets, into at least next year

ECB Governing Council member Nagel signaled, again, that the ECB will continue to hike rates to tackle inflation. He said the economic costs of high inflation are ‘serious’ and that ‘further interest-rate hikes are to follow at the next monetary policy meetings’. Further ‘decisive action is required’ as the risk to the inflation outlook remain on the upside and the risk of de-anchoring long-term inflation expectations remains high

Data due today includes US durable goods orders, conference board consumer confidence and new home sales while speakers include Evans, Bullard and Powell from the Fed, ECB’s Centeno and Villeroy and BoE Chief Economist Huw Pill