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Just the beginning

View from the Trading Desk:

This morning's U-turn by the Chancellor of the Exchequer on his unfunded tax cut for Britain's highest earners was a necessary move, yet it's unlikely to appease both markets and the public for very long. Kwasi Kwarteng didn't have much of a reputation as an economist before landing the top job at the Treasury Department, and it's clear to see why. His 'Growth Plan' has made the government look truly ridiculous on a global scale meaning his days in the job might already be numbered. At the very least, the ruling Conservatives will either have to continue walking-back tax cuts or plough ahead with a new age of austerity – as signalled by a Senior Cabinet Minister over the weekend.

It's interesting to us that this clip has been circulating in recent days; after all, Rishi Sunak is a fiscally credible alternative to both Truss and Kwarteng that would likely settle market jitters. We know it seems ludicrous in a developed economy to be suggesting regime change after just a month in power. Still, it's hard to argue that Truss is more than one or two poor decisions from losing the confidence of her party members. It's also worth noting that Sunak was far more popular amongst Conservative MPs than Truss, and thus far, his predictions for the economy have been well founded. 

The rest of the 'Mini-Budget' is still a serious source of contention; borrowing billions to fund energy support packages and other tax cuts is just not seen as Conservative in nature. Failure to pass these big pledges through Parliament could well be seen as a proxy confidence vote on Truss's leadership.

Bottom line: Bottom line: We think this could be a really interesting week for Sterling, with the Conservative Party conference taking place over the next few days. If the government continues to walk down a more fiscally prudent path, we could see the Pound's risk premium start to fall. This might bring GBP/USD further toward the $1.15 handle in the near term. However, in our opinion, the longer-term outlook remains bearish, with a slew of economic and political issues to tackle. 


The week ahead


Despite nose-diving to all-time lows against the Dollar last Monday in the wake of UK Chancellor Kwasi Kwarteng's remarks about further tax cuts, the Pound ended the week higher against all G10 currencies. Since there are no high-impact UK data releases this week, the gilt market, along with political headlines, will likely be the driving factors for Sterling's performance, as well as economic data out of the EU and US. PM Liz Truss and her Cabinet have already reneged on their plans to axe the 45p top tax rate after scrutiny from Tory MPs which will likely result in increased Pound volatility throughout the week ahead.  

  • Bank of England Monetary Policy Committee member Catherine Mann will talk in London on Monday evening in a panel discussion titled 'The path back to 2 percent'.
  • The UK Housing Equity Withdrawal quarterly data is due to be released on Wednesday, which measures the change in the total value of new home-secured loans that are not used for purchases or improvements. 
  • Also on Wednesday, we will see the 10-year bond auction along with the average interest rate on UK gilts. 
  • The UK Construction PMI data is expected on Thursday morning, with a small shrink in industry size predicted. 
  • On Friday, the Bank of England will release its Quarterly Bulletin containing commentary on market developments along with economic reports and market analysis. 


Last week's intervention by the BoE in the UK gilt market seems to have steadied the EUR/GBP exchange rate as the pair largely traded flat last week between 0.8900 and 0.9000 and may remain a supportive factor in the coming week. Gas prices remain the main culprit for Eurozone CPI inflation, which surprised investors by coming in at 10% y/y for September, up from 9.1% the previous month. Such an increase should enforce expectations of a hawkish ECB on the 27th of October. 

  • European Central Bank president Christine Lagarde will speak with students in Cyprus on Tuesday afternoon, which could inject some Euro volatility. 
  • Also on Tuesday, the Economic and Financial Affairs Council will meet to coordinate the policies of the 28 member states. 
  • Wednesday morning will see the release of EU and individual services PMI data from France, Germany, Italy, and Spain. 
  • The ECB Monetary Policy Meeting Accounts is expected on Thursday afternoon, giving insight into the economic conditions that influenced the bank's last interest rate decision.


After Cable hit all-time lows of 1.0350 last Monday, the Greenback gave up its ground, and the pair started above the 1.1200 level this week. When the news dropped early this morning about the abolition of the 45p UK tax rate cut, the Pound gained another percent and has been sitting at around 1.1220. Investors will be looking at the ISM surveys as well as last month's Non-Farm Payrolls data and monetary policy commentary from FOMC members for clues about the US economic outlook this week. 

  • The Institute for Supply Management Manufacturing PMI is due to be released at 3:00PM BST with an industry expansion on the forecast, and the Services PMI is expected on Wednesday.
  • On Tuesday, the Bureau of Labor Statistics will release the JOLTS Job Openings data, which shows the number of job openings during August, excluding the farming industry. 
  • Thursday night will see talks from two Federal Open Market Committee members to discuss the economic outlook and monetary policy. 
  • The Non-Farm Employment change numbers are scheduled to be delivered on Friday afternoon, with an estimated 265K more people in employment for the month of September. The total unemployment rate is expected to hold steady at 3.7%.


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