Traders are now pricing a faster pace of monetary easing, diminishing the allure of the strongest-performing currency among Group-of-10 nations so far in 2024. Some, including Millennium Global Investments, see it sliding as much as 10% over the medium term.

All it took was a few phrases from Bank of England Governor Andrew Bailey.

The BOE could become a “bit more aggressive” and “a bit more activist” in its approach to cutting rates, he told the Guardian newspaper last week. By Friday, the currency had clocked its biggest weekly loss since February last year.

“This could be a turning point for the pound,” said Nick Andrews, senior FX strategist at HSBC Holdings Plc. Bailey’s remarks were “deliberate” and “meaningful,” he said.

For months, investors have been plowing into sterling on expectations slower easing by the Bank of England relative to other central banks would preserve the currency’s high-yielding status.

A surprisingly large rate cut by the Federal Reserve last month only cemented the view, and drove the pound as high as $1.3434, its strongest level since February 2022.

But now, options contracts show traders are paying up to protect themselves against a fall in sterling. So-called risk reversals, often used as a barometer of sentiment, have fallen sharply across tenors in the past week.

Over the next month — a period that covers the next policy decisions by the Fed and the BOE as well as the US election — risk reversals trade at the most bearish levels for sterling in three months. At the same time, the cost to hedge against swings in the UK currency is heading toward its highest since April 2023.

That suggests further pain ahead for investors that have crowded into bets on pound strength in recent weeks. Bullish wagers by hedge funds and other leveraged funds are around their highest in six years, and those accounts again boosted wagers on the pound ahead of Bailey’s comments, according to data from the Commodity Futures Trading Commission.

Downward Momentum

“When you have such stretched positioning, it always raises the risk that you get a sharp repricing as the market’s expectations for rate cuts changes,” HSBC’s Andrews said. “I expect the downward momentum behind a lower sterling will build, and some of these long sterling positions to be taken out.”

Rates markets are pricing an almost quarter-point cut at the BOE’s next meeting in November. Between then and the end of 2025, they are betting on a total of 119 basis points of easing, while HSBC envisages much more aggressive moves of 225 basis points for that period.

A key test for the currency is approaching later this month, when UK Chancellor Rachel Reeves announces a budget expected to contain tax hikes and austerity measures, which could crimp growth in the coming years.

“It’s surprising that the British pound remains so strong,” said Pierre Lequeux, head of investments at $26 billion currency manager Millennium Global Investments. “Markets are underestimating fiscal risks to UK growth and domestic consumption ahead of the October budget.”

Lequeux sees the currency closer to $1.20 over the medium term, a drop of almost 10%.

Some aren’t convinced, arguing that political stability is spurring demand for UK assets, which will continue to support the pound in the coming months.

The latest selloff “may be overdone,” said Jane Foley, head of FX strategy at Rabobank. She sees the pound bouncing back to end the year at $1.34, while trading at 0.84 versus the euro.

“UK inflation risks still suggest that the BOE could be slower to cut rates than several of its peers,” she wrote in a note.

Echoes of 2018

But others see warning signs in the recent past.

The current scenario is reminiscent of early 2018, the last time investor positioning piled up so strongly in favor of the pound.

At the time, a warning from then-BOE Governor Mark Carney that slowing growth could delay the start to rate hikes triggered a selloff. As the bullish bets were unwound, the currency sank about 12% versus the dollar in the ensuing months.

According to Jordan Rochester, head of macro strategy at Mizuho International, a replay is possible.

“It’s like when Carney said in 2018 that GDP could come in weak, and if so, they may need to slow the pace of rate hikes,” he said. “Bailey’s just done the same, but in the opposite direction.”

“Even if the selling this time isn’t as extreme as that move, we could still see a fall or around 5% or so,” Rochester added. “The risk reward is quite clear to me. I’m not sure what the upside is.”

Source: The edge markets

Silver (XAG/USD) extends its retracement slide from the vicinity of the $33.00 mark, or the highest level since December 2012 touched last week and remains under heavy selling pressure for the second straight day on Tuesday. The downward trajectory drags the white metal to a one-week low, around the $31.00 round figure during the first half of the European session.

From a technical perspective, the recent repeated failures to find acceptance above the $32.00 mark constitute the formation of a bearish multiple-tops pattern on the daily chart. That said, oscillators on the daily chart – though have been losing traction – are yet to confirm the negative bias. Hence, it will be prudent to wait for some follow-through selling below the $31.00 round figure before positioning for any further losses.

The XAG/USD might then accelerate the fall towards the $30.60-$30.55 horizontal support before eventually dropping to the $30.00 psychological mark en route to the $29.75-$29.55 confluence. The latter comprises the 100-day Simple Moving Average (SMA) and the 50-day SMA, which if broken should pave the way for a further decline towards the $29.00 mark and the next relevant support near the $28.60-$28.50 region.

On the flip side, the $31.55 area now seems to act as an immediate hurdle, above which the XAG/USD could climb to the $31.75-$31.80 intermediate resistance and the $32.00 mark. Some follow-through buying beyond the $32.25 supply zone might then allow bulls to make a fresh attempt to conquer the $33.00 round figure before climbing further towards the December 2012 swing high, around the $33.85 region.

Silver daily chart

Source: FXSTREET

Oil prices declined on Tuesday with concerns over potential oil supply disruption easing as the market still awaits an Israeli response to the Iranian rocket attacks last week which triggered the crude price rally.

Panmure Liberum analyst Ashley Kelty said prices are set to remain volatile but profit taking could pressure the market in the absence of a material shift in activity in the Middle East.

Both contracts rose more than 3% on Monday to their highest levels since late August, adding to last week's rally of 8%, the biggest weekly gain in over a year, on concerns that escalating hostilities could disrupt oil supplies from the Middle East.

The oil price rally began after Iran launched a missile barrage on Israel on Oct 1. Israel has sworn to retaliate and is weighing its options, with Iran's oil facilities considered a possible target.

"Oil can keep ascending only for so long purely based on perceptions and not actual supply disruption ... although it would be irresponsible to claim that the dust has settled on Iran's direct and ominous involvement in the conflict, but for now the threats of Israeli assaults on Iranian oil infrastructure have not materialised yet," said Tamas Varga of oil brokerage PVM.

However, some analysts said an attack on Iranian oil infrastructure is unlikely and warned oil prices could face considerable downward pressure if Israel focuses on any other target.

"Oil prices are suffering from a risk-off environment, likely driven by some disappointment on the latest Chinese stimulus measure announcement," said Giovanni Staunovo, analyst at UBS.

China said on Tuesday it was "fully confident" of achieving its full-year growth target but refrained from introducing stronger fiscal steps, disappointing investors who had banked on more support from policymakers to get the economy back on track.

Investors have been concerned about slow growth dampening fuel demand in China, he world's largest crude importer.

In the US, Hurricane Milton intensified into a Category 5 storm on its way to Florida after forcing at least one oil and gas platform in the Gulf of Mexico to shut on Monday.

Traders will be also looking out for the latest US crude oil inventory data, with analysts expecting stocks to rise by 1.9 million barrels in the week ended Oct 4, according to a preliminary Reuters poll.

The American Petroleum Institute is due to post its tally of US stockpiles at 2030 GMT on Tuesday, followed by the official tally from the Energy Information Administration at 1430 GMT on Wednesday.

Source: The edge markets

When Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves plotted Labour’s path to power in the UK, they banked on eye-catching moves to hike taxes on private equity and ultra-rich “non-dom” residents to fund key spending plans. Now, those promises are meeting reality.

Reeves is reviewing how to implement both pledges because of internal Treasury analysis which says the moves could end up costing the exchequer money, rather than raising upwards of £5 billion ($6.6 billion) over the parliamentary term, according to a person familiar with her thinking, who requested anonymity discussing sensitive matters.

Having to re-evaluate two flagship tax plans is a setback for Reeves as she prepares to deliver her first budget on Oct. 30, after signaling she’ll raise taxes to fill a £22 billion fiscal hole she says the Tories left her. With costings from the Office for Budget Responsibility key to determining how much fiscal space she has for Labour’s priorities, the set-piece is seen as a make-or-break moment for the government, and the chancellor is under pressure to fix the public finances while also encouraging growth and investment.

The Treasury analysis contrasts with Labour’s pre-election costings which said an overhaul of the regime taxing non-doms, British residents whose permanent homes are deemed to be abroad, would raise £2.6 billion over five years, while closing the so-called carried interest loophole on private equity would net £560 million a year. The funds were earmarked for the National Health Service and legal aid for victims of disasters.

“They’ve realized that the response to raising any of these other taxes, which is supposed to be taxes on the wealthiest, is quite large,” said Daniel Herring, researcher for economic and fiscal policy at the Centre for Policy Studies, a think tank. “People will probably just leave. But it’s also really hard to quantify these impacts.”

Over the weekend, doubts were raised about a third policy — Labour’s plan to charge value-added tax on private school fees — after government aides confirmed an Observer story that the measure might have to be delayed beyond its planned start date in January because of administrative difficulties. But on Monday, Starmer’s spokesman, Dave Pares, told reporters “there has been no change” in the timings.

Several economists — including Jamie Rush and Dan Hanson at Bloomberg Economics — have suggested Reeves should change her fiscal rules to allow more borrowing for investment to boost growth rather than damage the economy with higher taxes.

In a paper published Tuesday, the Institute for Public Policy Research urged the chancellor to switch her debt rule to a “public sector net worth” measure that catches the value of investing alongside the debt. The rule would have PSNW increasing in five years’ time. Jim O’Neill, the former Goldman Sachs chief economist, said it was a “more comprehensive debt metric” that would bring the rules “more in line with how financial markets think about fiscal sustainability.”

Reeves’s re-think on the non-dom reforms centers around Labour’s pledge to subject assets held overseas to British inheritance tax, a plan that has sparked a furious backlash among wealthy residents and warnings of capital flight. The prospect of people leaving the UK has also caused the review of the carried interest policy. Under Labour’s original plan, carried interest — a fund managers’ portion of profits on asset sales — would be taxed at the top income tax rate of 45%, rather than the 28% capital gains rate.

Mitigating Reeves’s dilemma is that the non-dom and carried interest changes only make up a small part of the government’s overall financial plan - so the potential economic hit from her re-think is limited.

“In revenue terms, these are minor issues,” said Stuart Adam, senior economist at the Institute for Fiscal Studies. They “don’t make any significant difference to the fiscal position at the budget.”

A separate person familiar with Reeves’s thinking said that she is committed to delivering on the promises Labour made in its manifesto, but that she is going to be practical rather than ideological about how measures are implemented.

The Treasury said in a statement that the government is “committed to making the tax system fairer and raising revenue to rebuild public services.”

“That includes ending tax breaks on private schools, reforming carried interest and removing the outdated non-dom tax regime,” the Treasury said.

Source: The edge markets

The appreciation of the Malaysian ringgit against the US dollar was “a bit fast” during the three-month span between July and October, which may disrupt business planning and cause companies to struggle to adjust prices and operations smoothly, according to the World Bank. 

World Bank lead economist for Malaysia Dr Apurva Sanghi said that one of the purposes of a flexible exchange rate is to act as a shock absorber to exogenous changes, but it is only effective when there are no large disruptive swings.  

“In an ideal world, a gradual appreciation would allow the economy and businesses to adapt more smoothly, supporting long-term stability,” he told reporters during a press briefing on the World Bank’s Malaysia Economic Monitor October 2024 report on Tuesday. 

The Malaysian ringgit has appreciated about 5.3% year-to-date against the US dollar, rebounding from its depreciation in 2023, making it one of the strongest-performing currencies in Asia. 

“There is a feel good factor too (over ringgit appreciation) but I think these ‘good vibes’ won’t last very long. So you have to keep in mind some of these important longer term structural things as well,” he added. 

While the strengthening of the ringgit against the US dollar is mostly welcomed by Malaysians, the economist reminded that currency movements, like any price changes, create both winners and losers. 

“So, a stronger ringgit obviously benefits importers by lowering import costs but it makes exports more expensive and less competitive in global markets. As we know, Malaysia is a highly export-oriented economy, so, you look at E&E (electrical and electronics), you look at commodities, these are the sectors to be potentially affected,” he said. 

Furthermore, Apurva added that export-oriented small and medium-sized enterprises (SMEs) will be more affected by a rapid appreciation of the ringgit, compared to large companies, as more sophisticated companies would have hedging strategies to combat currency fluctuations.  

“So the real nature of the impact on how severely affected these export-oriented companies would be [by] the appreciation of the ringgit, would depend on the hedging strategies they have in place,” he said. 

Source: The edge markets