GBP

Sterling rallied to its best level for twenty months against the euro yesterday but struggled against the dollar as UK bond yields rose to twenty-nine month highs.

The increase in bond yields follows heightened expectations amongst investors that the Bank of England could soon look to raise interest rates with money markets pricing in a UK rate hike at 90% before year end.

Despite the lofty expectations for a rate hike, many economists feel that it will not solve the inflation problem in the UK. Many of the inflationary pressures have been caused by transitory factors which include higher fuel prices and supply chain constraints. Speaking on Monday, BoE policymaker Tenreyro sided against a UK rate hike for now. Tenreyro called for time, adding that she sees no urgency in raising rates due to the temporary factors affecting inflation and wanted to see how the end of the furlough scheme was impacting unemployment.

Government data showed Covid infections falling from the week previous. As of yesterday, the UK recorded 40,594 new cases down from 43,738 the week previous.

EUR

The euro continued to trade lower against a basket of currencies yesterday as investors prepared themselves for dovish comments from this week’s European Central Bank interest rate decision.

Despite inflation posting its reading for thirteen years, investors expect ECB President Lagarde to adopt a dovish stance as it was only last month that Lagarde stated the ECB was still pretty far away from hiking rates.

Current market forecasting is keeping the euro pressured with the next ECB hike expected in 2023 which is someway behind the BoE (2021) and the Federal Reserve (2022).

Key announcements

13:30 – USD – Durable Good Orders (Sept) expected -1.1%
13:30 – USD – Non-defense Capital Goods Orders ex Aircraft (Sept) expected 0.5%