The Middle East crisis is now having a limited effect on the major currency markets, which are still predominantly influenced by inflation data and central bank statements and actions. The US dollar rose against the majority of international currencies as the US inflation report for September indicated that the downward trend is stopping. Latin American currencies were the notable exception, as they benefited from rising oil prices. Following the results of the elections won by the opposition parties favoured by the European union on Sunday night, the Polish Zloty appreciated.
This week appears to be rather light in terms of central bank and economic release schedules. The primary topics of emphasis for G10 currencies will be labour market data (due out on Tuesday), UK inflation data (due out on Wednesday), and Japan inflation data (due out on Friday). This week, speeches by representatives of the Federal Reserve, the European Central Bank, and the Bank of England may also offer some much-needed insight into central bank thinking.
This week we will have a variety of economic data and insight on the views of the Bank of England after a week with hardly any market-moving data coming out of the UK. The crucial inflation report on Wednesday will be set in motion by the labour market statistics released on Tuesday. On the premise that a disinflationary trend is now firmly in place, the market pricing of the terminal rate in the UK has drastically changed. Any setback on this front, particularly with relation to core inflation, could cause the Bank of England to reevaluate its future actions sharply and strengthen the pound.
The main news from the Eurozone last week was yet another gloomy data on industrial production for August that revealed a steep decline. This won’t do much to refute the myth of European stagflation because output stagnates and inflation is reducing slowly. Despite the gloom, the Euro fared admirably, closing the week almost flat against the dollar. This would seem to support our belief that the odds are stacked against the Eurozone in a highly negative direction at this point, and that any good surprises could have an outsized impact on the single currency.
Even though the important September inflation report was boisterous, the Federal Reserve received little solace from it overall. A number of core services price indicators became more stable; this sticky inflation type had previously exhibited hesitant signals of clearly declining. Despite the Middle East unrest and the ensuing flight to safety, which normally supports the US dollar, yields increased. This beneficial impact was partially offset by a perception among Fed officials speaking at the event that the recent increase in long-term rates had tightened financial conditions and done some of the work for the central bank, lowering the need for more hikes.
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