Always bet on the lettuce… – Sterling Update

GBP

Whilst this week has been far more comfortable for sterling and gilt traders, the same cannot be said for Liz Truss and her government. After much intense speculation, Truss resigned as PM yesterday (Thursday) afternoon, marking the end of the shortest serving term as British PM in history, at just 45 days. Truss said that she could not ‘deliver the mandate she was elected, and had notified the King that she was resigning as Tory party leader.’ Truss also said in her speech that she expects a new leader to be announced within the next week.

Leading into the announcement, Wednesday had been particularly tough day for the government, with home secretary Suella Braverman quitting, after sending a confidential email from her private email, coupled with reports of Tory MP’s being ‘manhandled’ during a vote on fracking. Of course, all of this comes after Truss was forced into publicly apologising (several times) for the mini-budget tax cuts and energy price cap fiasco, which fledgling chancellor Jeremy Hunt was forced to unwind in order to stabilise markets, in a bid to avoid possible further sterling and gilt market meltdowns. Speculation had mounted that Truss would be resigning, after an unexpected meeting with the head of the 1922 committee, Sir Graham Brady, earlier in the day. The 1922 committee decide on the leader of the Tory party. Amongst the front-runners for the job are former PM Boris Johnson and his chancellor, Rishi Sunak. Aside from the ongoing political drama, the latest UK inflation data for September saw headline inflation jumping back over 10% (YoY), which has added to the belief that the BoE will go for a larger rate hike at their next meeting. In further worrying signs for the economy, the latest UK Retail Sales (released Friday) declined by 1.4% through September, against an expected drop of 0.5%.

As for sterling and UK gilts, well after a turbulent few weeks, a sense of normality has ensued, with daily ranges for the pound reverting to far more digestible levels. GBP/USD has therefore traded within a 1.1150 – 1.1440 range, and GBP/EUR has also gyrated between 1.1400 – 1.1600 throughout the week. The daily changes in key UK gilt yields have also reverted to a far more ‘normalised’ range. Of course, the fluid political backdrop still has the potential to impact the short-term profile for the pound, but in the long-run markets will likely pay far greater attention to the fiscal outlook, ongoing BoE moves and what is happening at No11, than the comings and goings next door, at No 10.

EUR

The latest Euro area inflation report highlighted that over half of the countries in the block now have inflation that exceeds 10% (YoY). The latest HICP inflation saw headline inflation near 10% for the region as a whole, jumping from 9.1% in August. Energy prices continue to dominate the increase, magnified by Russia’s decision to limit gas supplies to the region.

The European Commission have proposed a EUR40bn package, aimed at helping small and medium-sized businesses and look to ‘address energy poverty through support to vulnerable households.’ At the time of writing, EU leaders were meeting to discuss the package. Germany have unveiled their own EUR200bn plan to combat the energy crisis and soaring costs, with relief measures including a price cap on gas, and a tax on windfall profits for energy companies.

Elsewhere, the latest ZEW Survey highlighted how the Current Situation has deteriorated to -72.2, but with a pleasant upside boost to Economic Sentiment, which rose from -61.9 to -59.2.

Given surging inflation in the region, it seems highly likely that the ECB will go with a bold rate hike again at next week’s meeting. Another 75bps hike looks the order of the day, according to analyst estimates, with 75% of economists polled by Reuters going for a repeat of the last ECB meeting. Interestingly enough, only two economists polled favoured a 100bps hike, with the remainder opting for a 50bps move.

As for the single currency, well the broad 0.9600 – 1.0000 range in EUR/USD looks well-established for now. If anything, the Euro has trended slightly higher through this week, but next week’s ECB meeting is far more likely to generate some serious intra-day volatility.

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