Last day for Conservative members to select a new Prime Minister

EUR

The European Central Bank looks set to deliver another large interest rate hike next Thursday. The plan appears to be to tighten its monetary policy before economic conditions get any worse. With inflation approaching double digits the question now seems to be whether opting for a 50 basis points hike or a more aggressive 75 basis points increase.

Analysts at major banks including Goldman Sachs now expect a 75 bps hike after the latest CPI data shows inflation is still rampant even after the last 50 bps rate rise in July. ECB Board member Isabel Schnabel warns that the central bank is at risk of losing public trust and credibility, and that it needs to act to aggressively curb inflation.

With the probability of a large rate hike next week, the euro has gained against the pound to three-month highs. A fall in European gas prices, due to EU countries bulking up their reserves for winter, has also aided the euro. European storage levels are ahead of target which has led to a drop in wholesale gas prices.

Investors will focus on this month’s Federal Reserve’s rate hike decision as the central bank also weighs up a 50 or 75 bps rate increase. As things stand, money markets are currently pricing in a 64% probability of the latter.

GBP

The pound continues to be battered on all fronts with the economic situation continuing to deteriorate. The UK Budget later this month will be in focus with the expectation of a raft of special measures coming from the new government designed to support UK households and businesses. There is fear that unsustainable borrowing could put pressure on the cost of servicing the debt making foreign investment for UK assets unattractive.

Monday will see the announcement of a new Conservative Party leader and Prime Minister. The market will be fully focused on the new PM’s plan to address the energy crisis and how they will combat the cost of living squeeze. If the new leader can convince the market with a credible plan, the pound could potentially get short term boost. However if the plan is not seen as credible we could see the pound come under greater selling pressure.

The pound could see further pressure from the US dollar today as US non-farm payrolls data is expected this afternoon. A strong number will likely see more downward pressure for Sterling as the US appears to still have a robust jobs market and could avoid recession even while the Fed continues to raise interest rates.

Key announcements

13:30 – USD – US non- Farm payrolls – Forecast 295k

13:30 – USD – US Unemployment rate – Forecast 3.5%

13:30 – USD – US Average earnings – Forecast 0.4%