Markets Report - 10 October 2022

A daily breakdown of the markets for the 10th October 2022, provided to you by Sterlex.

🇪🇺💶Expect inflation to go down in 2023, but the question is how fast. Risks of second-round wage effects on inflation will increase. The European Central Bank (ECB) will have to take significant interest step again in October. After all, our BEER FX equilibrium model has consistently shown that the EZ-US terms of trade (price of exports divided by price of imports) differential is the primary determinant of real EUR/USD medium-term swings, and currently shows that the pair is not undervalued. The energy crisis is forcing a radical shift in the export-oriented economic framework of the eurozone, a theme that will prevent a rapid return to above-parity levels in EUR/USD. Expect significant moves by ECB will be needed in 2023 to get inflation down. Markets seem to underestimate the upward risks in the inflation outlook.

🇬🇧💷The Bank of England announces the launch of the Temporary Expanded Collateral Repo Facility (TECRF) to support market functioning. That said, any meaningful upside still seems elusive amid concerns about the UK government's fiscal policy and recession fears. This, in turn, provides a modest lift to the British pound and assists the GBP/USD pair to rebound over 50 pips from the 1.1050 area, or a one-week low touched last Friday. The GBP/USD pair stalls its recent sharp pullback from the vicinity of the 1.1500 psychological mark and attracts some buying on the first day of a new week. Spot prices edge higher through the early European session and climb back above the 1.1100 mark, though lack bullish conviction.

🇺🇸 🏦US markets are closed for a national holiday today, so we could see a quieter than usual start of the week in markets. This view has been bolstered further by recent solid results from some US fundamentals as well as the persevering hawkish message from Fed rate-setters. In the meantime, investors keep favouring the dollar amidst firmer speculation of a large rate hike at the next Fed event on November 2. The index advances for the fourth consecutive session at the beginning of the week in a context favourable to the risk-off trade, while market participants continue to digest Friday’s release of US Nonfarm Payrolls (+263K). Moving on, we remain bullish on the dollar, as the underlying narrative of a hawkish Fed – paired with lingering geopolitical and energy prices concerns – should keep risk sentiment weak and safe-haven flows into the greenback strong. Nothing scheduled in the US docket on Monday should leave the attention to speeches by Chicago Fed C Evans (2023 voter, centrist) and Vice Chair L Brainard (permanent voter, dove).