GBP/USD: To Trade in a Sideways Range of 1.3065/1.3135 – UOB Group

Pessimistic eurozone outlook keeps Bund yields from ticking higher with oil prices

EUR rates have settled higher after that big US payrolls number last week and are likely to trade more range-bound in anticipation of the upcoming European Central Bank decision. The conviction of a 25bp cut next week is high and there will be little economic data until then that could persuade markets otherwise. Having said that, we do have oil prices to watch, which have shown quite some volatility of late. If we see more upside surprises from global growth, and at the same time headlines from the Middle East emerge, the risk of higher prices could be considerable.

Still, Bund yields reacted only moderately to the recent uptick in oil prices (see figure below), which emphasises markets’ diverging expectations between global and eurozone growth. The US labour market is showing signs of resilience (again), whilst Chinese growth expectations are improving on the back of broad stimulus measures, helping oil prices to go higher. The potential bright spots for the eurozone are more difficult to see and given growth concerns are getting more attention of late than inflation, the front end of the Bund curve is likely to remain anchored for now.

Whilst the ECB did mention the decline in oil prices as a supporting factor in its decision-making earlier, we would need to see a lot more to convince markets that an October cut may not be as obvious as priced in. Also on Tuesday various ECB speakers, including the known hawk Nagel, hinted at a willingness to cut in October. Nevertheless, the current pricing of 24bp for a cut may be stretched and a sudden push higher by oil could challenge that positioning.

EU to remain prominent in primary markets even after Tuesday's larger deal

The EU issued €11bn via the syndicated reopening of two bond lines, €5bn in a 3y and €6bn in a 15y. Investor appetite looked healthy with a combined book of €166bn and in the end the size of the transaction exceeded market expectations, and was also larger than the September deal. 

Among the European supra names EU, ESM, EFSF and EIB, the EU is the only issuer that still has a notable amount to fund this year. With close to €118bn issued, slightly more than €22bn remains to reach the indicated target of €140bn for 2024. ESM and EFSF have completed their funding for the year, and EIB said its 5Y EUR bond issued last week was the last EUR benchmark for the year with close to €62bn of its €65bn funding target reached.

In terms of spreads, the valuations of the sector versus swaps in the 10y area are still around 5-6bp cheaper versus the end of August, but there has been some stabilisation since the beginning of this month.

Today's events and market views

Relatively little data is scheduled, with US mortgage applications likely the highlight. In contrast, there are plenty of central bank speakers on the agenda. From the ECB, we have Villeroy speaking and from the Fed the list includes Bostic and Goolsbee. The FOMC meeting minutes from 18 September will also be published. 

In terms of issuance, Germany has scheduled a 12Y and 17Y Bund for a total of €1.5bn. From the UK we have a 10Y Gilt for £3.75bn. Lastly, the US will auction a 10Y Note for $39bn. 

Recent uptick in oil prices did not find its way to Bund yields

The USD/CAD pair scales higher for the sixth successive day on Wednesday and climbs to the 1.3670-1.3675 area, or its highest level since August 19 during the first half of the European session amid renewed US Dollar (USD) buying.

Following a brief consolidation over the past two days, the USD attracts fresh buyers amid firming expectations that the Federal Reserve (Fed) will go slow on interest rate cuts. In fact, traders are currently pricing in over an 85% chance that the US central bank will lower borrowing costs by 25 basis points in November amid signs of a still resilient labor market. This allows the yield on the benchmark 10-year US government bond to hold above the 4.0% threshold, which lifts the USD to its highest level since August 16 and continues to act as a tailwind for the USD/CAD pair. 

Meanwhile, news of a possible ceasefire between Lebanon's Hezbollah and Israel lowered the geopolitical risk premium in the markets. This led to the overnight slump in Crude Oil prices, which, along with bets for a jumbo interest rate cut by the Bank of Canada (BoC) later this month, undermines the commodity-linked Loonie and boosts the USD/CAD pair amid some follow-through technical buying above the 200-day Simple Moving Average (SMA). 

Moving ahead, investors now look forward to the release of the FOMC meeting minutes, due later during the North American session. This, along with the US Consumer Price Index (CPI) and the US Producer Price Index (PPI) on Thursday and Friday, respectively, will be looked upon for cues about the Fed's rate-cut path. This, in turn, will drive the USD demand in the near term. Apart from this, Canadian monthly employment details on Friday should provide some meaningful impetus to the USD/CAD pair and help in determining the next leg of a directional move.

Source: FXSTREET

Gas stations in Florida are running out of fuel as people are evacuating ahead of Hurricane Milton, expected to be a once-in-a-century direct hit on Tampa late on Wednesday.

Late on Tuesday, the National Hurricane Center said that Milton is forecast to retain its major hurricane status and expand in size while it approaches the west coast of Florida. Tuesday was the last full day for Florida residents to get their families and homes ready, and evacuate if told so by local officials, the NHC added.

“Milton will move across the eastern Gulf of Mexico through Wednesday, make landfall along the west-central coast of Florida Wednesday night, and move off the east coast of Florida over the Atlantic Ocean on Thursday,” said the office of Florida Governor Ron DeSantis.

Parts of Florida are still recovering from Hurricane Helene in late September.

As of 11 p.m. ET on Tuesday, GasBuddy data was showing 21.6% of stations in Florida were out of gas, Patrick De Haan, head of petroleum analysis at GasBuddy, said.

Florida is the nation’s third-highest motor gasoline consumer, but it doesn’t have its own refineries so fuel needs to be brought in by tankers and trucks.

Fuel is flowing to Florida, but the sheer number of people evacuating is putting a strain on gasoline supplies at fuel stations, De Haan added.

In preparation for Hurricane Milton, Kinder Morgan shut on Tuesday its terminals and fuel racks in and around Tampa.

Ports in Florida have moved to restrict vessel navigation as Hurricane Milton intensifies as it makes its way toward the state’s coastline.

Oil and gas operations in the U.S. Gulf of Mexico have also been disrupted.

On Monday, Chevron said it had shut in its Blind Faith platform and evacuated all personnel from the facility in preparation for Hurricane Milton.

Source: OILPRICE

The AUD/USD pair attracts fresh sellers following an intraday uptick to the 0.6760 area and drifts into negative territory for the fifth straight day on Wednesday. Spot prices drop to the 0.6725-0.6720 region during the first half of the European session, closer to over a three-week low touched on Tuesday, with bears flirting with the 50-day Simple Moving Average (SMA). 

The Australian Dollar (AUD) continues to be undermined by the disappointment over China's stimulus update, which, along with a modest US Dollar (USD) uptick, exerts some downward pressure on the AUD/USD pair. China's National Development and Reform Commission stated on Tuesday that the economy is facing more complex internal and external environments and also fell short of announcing any new major stimulus plans. This, to a larger extent, overshadowed a relatively hawkish minutes from the Reserve Bank of Australia's (RBA) September meeting. 

Meanwhile, investors have been paring bets for a more aggressive policy easing by the Federal Reserve (Fed) and an oversized interest rate cut in November amid signs of a still resilient US labor market. This keeps the yield on the benchmark 10-year US government bond elevated above the 4% threshold and the USD Index (DXY), which tracks the Greenback against a basket of currencies, close to a seven-week high touched last Friday. Apart from this, a generally weaker tone around the equity markets benefits the safe-haven buck and weighs on the risk-sensitive Aussie. 

The fundamental backdrop supports prospects for an extension of the AUD/USD pair's recent retracement slide from the highest level since February 2023, around the 0.6940-0.6945 region touched last month. Bearish traders, however, seem reluctant and prefer to wait for more cues about the Fed's rate-cut path before placing fresh bets. Hence, the market focus will glued to the release of the FOMC meeting minutes later this Wednesday, which will be followed by the US Consumer Price Index (CPI) and the Producer Price Index (PPI) on Thursday and Friday, respectively.

Source: FXSTREET

Source: Poundsterlinglive

In focus today

Tonight, FOMC will release the minutes from its September meeting. Markets will focus on any clues regarding the expected size of rate cuts aat the coming meetings.

Economic and market news

What happened overnight

The Reserve Bank of New Zealand (RBNZ) lowered interest rates by 50bp from 5.25% to 4.75%, which was nearly fully priced in the market. RBNZ still views monetary policy as being restrictive even though inflation has returned to the target rate. This message could signal potential further rate cuts going forward, which made NZD/USD drop around 0.7% from 0.613 at the announcement to around 0.609 this morning.

Chinese stocks fell on Wednesday in the onshore market ending a 10-day streak of positive returns. The Shanghai composite index is down over 5% this morning compared to Tuesday’s closing price The onshore market was closed for longer during the week-long holiday, though, and has mainly played catch-up with offshore stocks after opening again. Hence the big decline today mostly reflects the sharp 10% sell-off in offshore stocks on Tuesday. Today offshore stocks declined further but by a more moderate 1.5%. The sharp correction in Chinese stocks follows a press briefing yesterday from the National Development and Reform Commission, which disappointed by not providing any details on fiscal stimulus as widely anticipated after the strong stimulus package announced ahead of the holiday. NDRC said the Chinese government is fully confident that it will reach its economic and social development goals for this year (5% growth) and said that some of the 2025-budget will be issued this year to support projects. The anticipation in the market is that more details on stimulus will be given later this month, which we also expect.

What happened yesterday

In Sweden, the new flash CPI for September came in marginally higher than expected. CPIF grew 1.2% y/y and CPIF ex energy at 2.0% y/y. We expected CPIF at 1.14% y/y and CPIF ex energy at 1.94% y/y in line with consensus and one tenth above the Riksbank’s forecasts. Hence the print was higher than Riksbank forecast, so overall the print supports for our 25bp cut forecast at the next meeting.

In the Middle East, Israel’s military said that it had deployed a fourth army division into Lebanon, which signals an expansion of the ground offensive against Hezbollah. Prime minister Netanyahu further claimed that the Israeli military has “eliminated” the successor leader of the Hezbollah movement after Nasrallah who was killed only two weeks ago in another attack by Israel.

In the US, NFIB Small Business Optimism index moved slightly higher in September to 91.5 from 91.2 in August. Firms reported less trouble finding new workers and a slight increase in hiring plans. Declining share of firms also report sufficient quality of available labour as their most important problem (which is still inflation for the largest share of businesses). Outlook for expansion, credit conditions and price plans remained steady. General uncertainty index reached its all-time-high, but the level is still comparable to the months leading up to 2016 and 2020 elections (= not alarmingly high). Overall, NFIB supports the notion that US economy remains on a steady footing for now.

Fed’s Kugler (voting member), spoke about monetary policy, and said that she is ready to vote for further monetary policy easing if inflation continues to decrease.

In Germany, industrial production came in higher than expected at 2.9% m/m (consensus: 0.8% m/m, prior: -2.4% m/m) in August, on the back of especially higher production in the automotive industry.

ECB’s Nagel spoke about monetary policy and said that he is open to considering another interest rate cut. This is interesting since Nagel has traditionally been considered too be an inflation hawk. Nagel said that ECB is clearly on the way to the 2% inflation target.

Oil prices slipped back. Weak demand, a stronger USD and lack of retaliation so far from Israel against Iran are likely the main reasons. We think oil prices will stay range bound close to USD 80/bbl as a rising geopolitical premium offsets weaker demand and stronger USD.

Equities: Global equities were higher yesterday, driven by a lift in US markets. Performance, both absolute and relative between regions, turned more or less upside down versus Monday, tempting one to declare a status quo. However, that is not entirely the case. Indeed, yields halted their upward trajectory, but utilities and REITs were significant underperformers again yesterday, while banks and tech ensured that both value and growth sectors performed adequately yesterday. Despite the multitude of factors at play these days, when we summarise the developments over a few weeks, we observe a generally positive reaction to the robust labour market data, including what we see in relative sector and style performance. It may also be pertinent to mention the performance of energy stocks yesterday; a glance at the oil price provides insight into the significant underperformance in that sector.

In the US yesterday, the Dow closed up by +0.3%, the S&P 500 by +1.0%, Nasdaq by +1.5%, and the Russell 2000 by +0.1%. Chinese markets are in focus again this morning. However, today they are experiencing negative performance, with both Hong Kong and especially mainland markets down sharply. The rest of Asia is higher, following the positive session on Wall Street yesterday. US futures are marginally lower, while European markets are mixed despite the uptick late in the US cash session yesterday. With fading optimism in China, there is also a negative impact on European exporters, particularly affecting high-end consumer brands.

FI: There were modest movements in global bond yields yesterday. 2Y and 10Y US Treasuries was trading in a tight range around 4%. We saw a similar picture in European government bond yields where there were also movement in yields. The Schatz-spread once again tightened, and we expect it will continue to tighten like the Bund ASW-spread. We still expect that the Bund ASW-spread will go towards 20bp before year-end.

FX: EUR/SEK ended the day fairly stable with a slight topside surprise to Swedish flash inflation data failing to provide support for the SEK. EUR/USD traded in a tight range with focus shifting to the release of inflation data tomorrow.