It was clear to see markets being very tentative yesterday, with the initial risk aversion in the morning easing by the afternoon. USD finished marginally higher on the day overall, alongside oil sensitive currencies such as CAD and NOK. GBPEUR managed to climb for the 6th consecutive day. Overnight, two Fed officials commented that the recent rise in treasury yields may have the Fed’s job of tightening monetary conditions, causing markets to bet that the Fed are done with hiking interest rates. Stocks gained as a result and USD gave up all the gains it had made in the morning.
Data this morning showed that UK retailers struggled in September as the warmer weather delayed spending on winter clothing. Another sign that the UK economy is struggling.
* Daily move - against G10 rates at 7:30am, 10.10.23
** Indicative rates - interbank rates at 7:30am, 10.10.23
Markets have opened up with a risk-on mood this morning, following on from those Fed comments last night. Much of the key data for FX markets will be out from tomorrow onwards, with US inflation being the key data point on Thursday. Until then we look at developments in the Middle East to garner impact on risk appetite in the markets. A weaker USD could well continue in the short term as we outlined last week.
The implications o risk appetite on GBP can be clearly seen in the chart below. Using the MSCI World Equity index as a measure for risk appetite, we can clearly see the correlation between how equities perform and how GBP performs as well. Talk of a slower global economy or even a recession will weigh on stocks, and should they drop then we expect GBP to do the same, especially now that the hawkish BoE no longer appears to be present.
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