The end of the US shutdown may prompt a slew of data & all eyes on UK inflation

Thursday will see the delayed US jobs report which might lend direction to the USD - the probability of a December 25bp Fed cut has dropped to 37% last week, now up near 50%, having fallen from 60%+ last week. Last weeks poor data (employment and inflation) from the UK leads us into this week with plenty more to digest and test the markets assumption of an interest rate cut next month.

USD:

·    It seems as though data and events on Wednesday/Thursday this week will largely determine the next move for the dollar. Wednesday evening also sees Nvidia release quarterly results, and then on Thursday, we finally see the September NFP jobs report – including the unemployment rate. Consensus currently expects a neutral/mildly dollar-positive outcome in that a Fed cut in December requires some actively weak US data.

·    On the political side, President Donald Trump stepped back on tariffs on more than 200 products, including coffee, bananas, and orange juice, acknowledging the impact of higher import costs on inflation and following a series of Democratic victories in local elections. The market reaction to the news, however, was marginal. DXY can probably hold the recent bounce and perhaps push onto the 99.50/65 area, where the move may stall.

·    Fed officials highlighted the upside risks of inflation last week, playing down concerns about a sharp deterioration of the labour market. This has prompted traders to push back expectations of a December rate cut to a 43% chance right now, from 60% last week and more than 90% one month ago.

GBP:

·    While GBP/EUR has moved lower (1.6% drop this month, and 5.75% drop this year) and short-term GBP rates higher on the view that the income tax rate may not be raised after all, GBP/EUR needs a solid break higher through 1.1365 to hold up. And a softer UK October CPI number tomorrow could easily see sterling under more pressure.

·    On the macroeconomic front, things have not been much better. Preliminary Gross Domestic Product data released last week showed that the economy contracted against expectations in the third quarter, with manufacturing and industrial production slumping.

- These figures have boosted investors’ expectations that the Bank of England will be forced to cut its benchmark interest rate further in the coming months, probably as soon as December.

·    EURO:  

·    Earlier in the day, European Central Bank Vice President, Luis De Guindos, showed confidence that Eurozone inflation will converge towards the bank's target for price stability, but warned about tariffs and sovereign debt, and showed concerns about the risks of an abrupt change of sentiment. These comments failed to ease pressure on the Euro.

·    EUR/USD opened the week on a soft note, and returns to the 1.1600 area at the time of writing, extending Friday's reversal from session highs above 1.1650. Markets remain moderately averse to risk on Monday, awaiting a backlog of delayed US economic data, which is underpinning support for the safe-haven US Dollar.

·    The Euro depreciates for the second consecutive day, as investors remain wary of taking risks and await the release of US economic data to better assess the momentum of the economy and the Fed's monetary easing calendar.

Elsewhere:

·    In Asia, comments by Japanese Prime Minister Sanae Takaichi, warning that a Chinese attack on Taiwan would trigger a military response, have opened a new area of friction in the region and hammered risk appetite, as China has asked its citizens to avoid travelling to Japan.

·    Canada. Analysts remain uneasy after last month’s inflation pickup, and the risk of US tariffs feeding into domestic prices is adding another layer of uncertainty. For now, both markets and the Bank of Canada appear poised to exercise caution. The Bank of Canada cut its benchmark rate by 25 bps to 2.25% in October, a move that largely matched what markets were expecting.