Oct 17, 2022
VOT Research Desk
A weak start to the week for the US dollar is mostly due to the prolonged rebound bounce in the GBP/USD pair caused by UK political unpredictability.
The safe-haven dollar dismisses investors’ concerns about China reiterating its zero-Covid policy, obstinate expectations for Fed rate hikes, and impending economic threats. Due to doubts over the 0.85% increase in the US S&P 500 futures; the Eurostoxx futures are down -0.10% in early European trading.
After Friday’s upward movement, the Asian stock markets declined and the US Treasury rates stayed low. In essence, traders were on edge as they awaited the UK chancellor’s announcement on a medium-term fiscal plan on Monday afternoon, while Tory backbenchers plotted to overthrow the UK government of Prime Minister Liz Truss throughout the weekend.
In light of reports that up to 100 letters of no-confidence have been sent to Sir Graham Brady, head of the 1922 Committee on the backbenches, a group of senior Tory supporters of Rishi Sunak intends to gather on Monday night for dinner hosted by the former Treasury minister Mel Stride, according to The Guardian. Keir Starmer, the head of the Labour Party, meanwhile urged PM Truss to address the Commons immediately on Monday. Following Kwasi Kwarteng’s dismissal on Friday, the new chancellor, Jeremy Hunt, spent the weekend attempting to reassure the public that the government was in charge of the economy.
Additionally, the meeting between Hunt and Bank of England (BOE) Governor Andrew Bailey and the ensuing upbeat comments from the governor of the central bank helped GBP enter the week with a significant positive gap.
Following Friday’s sell-off and the BOE’s decision to cease its emergency bond-buying program, attention will continue to be on the UK gilt market going forward. Additionally, traders are still on edge due to the USD/JPY pair’s persistent surge, which suggests that Japanese authorities may soon intervene. Earlier in the Asian session, a number of senior Japanese officials, including the Prime Minister, crossed the lines to reiterate their position that they are prepared to take the necessary actions to prevent unfavorable and swift FX changes.
While USD/JPY is stabilizing at its highest level in 32 years above 148.80, EUR/USD is benefiting from broader US dollar weakness and slow yields within the G10 currency basket. The difference in monetary policy between the Fed and the ECB as well as that with the BOJ is highlighted by hotter US inflation-induced higher sharper rate hike expectations from the Fed.
