In a week dominated by high-impact economic forecasts, UK and US markets are set for increased volatility. Keir Starmer’s prominent rival, Andy Burnham, has stirred controversy by suggesting that the UK government should disregard bond market signals. This statement, alongside a slew of economic data from the US and Europe, positions market participants for a critical examination of monetary policies and currency movements.
This week’s US economic data has been persistently stronger than expected. Here’s how that might affect the Federal Reserve’s next interest rate hike. On the other side of the Atlantic, concerns that the UK is backsliding on economic performance are front and center. Sterling has been doing poorly, particularly since the start of its slide in mid-September. Markets are jittery, facing downside risks such as a potential US government shutdown. They are treading carefully ahead of key inflation data releases from France and Germany which have potential to spark big moves.
UK Economic Outlook Under Scrutiny
Andy Burnham’s recent comments urging the UK government to overlook bond market dynamics have sparked debate among economists and political analysts. His comments point to a radical revolution in economic policy at a time when fears are mounting about the UK’s public finances. As the Labour government grapples with weak growth indicators, Burnham’s stance may reflect a desire to address left-wing pressures within the party. Any imagined concession to these groups would be toxic for Gilts and Sterling alike.
Yet the UK’s economic landscape is still fraught with challenges. Soft growth numbers and difficult public finance constraints make for a challenging environment, and not much room to maneuver in a creative way by the likely Labour government. These factors have led to Sterling’s weak performance, especially in the context of a strong US dollar. Market analysts will be looking to see how these political dynamics will affect investor sentiment going forward.
Furthermore, the fog of war has descended over Germany’s post-COVID growth prospects, and France’s fiscal flexibility boosts worries about the state of the European economy at large. Meanwhile, Spain’s economy—despite the euphoria of its recent World Cup soccer victory—is less than half as robust. This divergence will increase its attractiveness in the short term.
US Data Signals Impact on Monetary Policy
Turning to the US, we’ve seen a surprising economic data come out one after the other, sending shockwaves through markets. The last two months’ reports have surprised with high activity levels. This impressive shift might play a role in the Federal Reserve’s deliberations when weighing future interest rate cuts. Earlier this month, the central bank slashed interest rates. Yet that raises questions about how this dramatic decision makes sense amidst all the bettering economic indicators.
The next US jobs report is expected to be the most impactful one. It’ll be right in time with JOLTS job openings, weekly jobless claims and the September payroll report. US stocks would get higher confidence in US economy with a strong jobs report. This could force analysts to reconsider their forecasts for European Central Bank rate cuts, which would boost the euro vs. dollar.
Aside from things happening at home, the spectre of a US government shutdown hangs heavy in the air. With the showdown scheduled for Tuesday evening, this event has potential to inject still more volatility into financial markets. Investors keep a watchful eye on movements in this space. Specifically, they recognize how their actions could affect systemic market stability and their faith in government fiscal policy.
European Inflation Data on the Horizon
As the week plays out, European markets will be eyeing inflation data from Germany and France. On Tuesday, they’ll put out new consumer price index (CPI) figures. Many analysts expect that Germany’s CPI data will provide vital clues about its course going forward. At the same time, France’s numbers are likely to highlight its own budgetary strains.
Finally, the eurozone’s flash CPI is forecast to rise from 2.0% to 2.2% y/y. Some projections even expect it to reach as much as 2.3%. This expected increase will be central in shifting the narrative around monetary policy at the European Central Bank. It will likely affect currency valuations across the entire eurozone.
Turkey will add to this week’s data slate with its inflation figures for September due on Friday. These figures will shed important light on Turkey’s economic viability and the possible impact on its currency.
Given all these changes, currency markets are on notice, as market participants get ready for possible big swings in currencies. The dollar is likely to be flat around 98 on the DXY index going into the JOLTS release. Any potential move in either direction after this data could determine the direction of trading in the next few sessions.