USD moves dominated end-of-month flows, with the greenback gaining following the higher reading on the employment cost index in the afternoon. This added to the gains on USD from the morning following the dovish take on the Bank of Japan meeting. The employment data will heighten concern about inflation remaining about the Fed's target. Worth noting that US consumer confidence dropped to a five-month low in October. All eyes on JOLTS and ADP number this afternoon and the Fed's communication later in the evening. The EUR suffered yesterday after data showed that the economy shrank by 0.1% in the third quarter. On the positive though, inflation in the bloc fell to the lowest in 2 years reflecting the impact of the ECB's recent rate hikes. In light of the two data points, a rate cut is being priced in for March 2024.
* Daily move - against G10 rates at 7:30am, 01.11.23
** Indicative rates - interbank rates at 7:30am, 01.11.23
Start of a new month and we wonder what it will bring. Historically November tends to be one of the better months for risk appetite if performance of equity markets is anything to go by. For example, the S&P 500 has gained an average of 3.2% over the last 10 years. As we know GBP has a strong correlation to equity market performance so perhaps GBP could recover? See more below (Chart of the day). For today, we will be monitoring data from the US to gauge the strength of their economy and then in the evening we have the Fed meeting. Currently we are expecting a pause from the Fed with a reference to higher yields doing the job of tightening financial conditions. We wait to see what they say, and the wider implication on risk appetite and impact on USD. Also worth noting, Japanese authorities stated overnight that they are ready to intervene in the FX market should it be needed. As mentioned before, should we see intervention then this will likely lead to broad USD weakness.
One other thing to note as well is price action on GBPEUR. Yesterday we saw the pair make a new five-month low on anticipation that perhaps we were getting to get slightly positive GDP data. However as mentioned above, the economy contracted, and those lows were swiftly reversed with markets clearly not comfortable pricing GBPEUR that low. Let's see if the downtrend from mid-August can be broken.
Whilst October proved to be volatile with swings in both directions, the difference in movements from the opening rates at the start of the month to the end was actually very small – the GBP index finished 0.04% lower overall, indicating some indecision following a 4% fall on the index since July. So where next? If we look at seasonal performance, then GBP actually has its best month of the year when looking at its 10-year average – up 0.81%. This follows risk appetite flows as well if we look at performance in equities. For example, the S&P 500 has risen by 3.2% as an average over the last 10 years. So how does this translate onto our most common traded pairs? GBPEUR has risen by 0.79% on average over 10 years and GBPUSD has risen by 0.64% over that same time period. We can see below where this will take current rates should we see these average moves take place.
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