A Quieter Calendar, But Plenty of Questions for Sterling and the Dollar.

Last week marked the end of Q3 and the beginning of the final quarter of the year, and we saw a fair amount of volatility across both Sterling and US Dollar pairs. GBP/USD traded into the low 1.32s, while GBP/EUR had a much stronger week and finished Friday above 1.1750. This is an important distinction, as Sterling’s recent weakness against the Dollar has probably had as much to do with USD strength as it has concerns around the Pound, particularly when you consider how well Sterling has performed against the Euro at the same time.

Friday’s Non-Farm Payrolls came in below expectations and initially weakened the Dollar, although the reaction was relatively modest and certainly nothing like some of the moves we have seen following employment data this year. The softer number does bring the October Fed meeting into question, though. Having raised rates in September, another hike this month becomes harder to justify if we start to see consistent signs of weakness in the labour market. I don’t think one NFP report is enough to change the Fed’s position, particularly with inflation still above target, but the data we get over the next few weeks will now be important in determining whether September was a one-off hike or the beginning of further tightening.

This week itself is considerably quieter and, from an economic-data perspective, there really isn’t a huge amount to discuss. Monday brings services PMI figures from Europe, the UK and US. The European and US readings are expected to improve slightly, while the UK number is expected to come in a little lower. As always with PMI data, anything above 50 indicates expansion, but barring a significant surprise I wouldn’t expect these releases to change the wider outlook too much.

Tuesday is probably the most interesting day of the week with the release of the minutes from September’s Federal Reserve meeting. We already know that the Fed voted to raise rates by 25 basis points, but we should get some more detail on the discussion behind the decision and, importantly, how policymakers were thinking about the months ahead. Given Friday’s weaker employment figures, any indication that the Fed was already divided over the need for further increases would be particularly interesting. Equally, if the minutes show that there was broad support for additional tightening, the market may continue to take the possibility of an October hike seriously despite the softer jobs number.

Wednesday brings US weekly jobless claims. It is not normally a release I would spend too much time on, but after Friday’s NFP figures it is probably worth paying a little more attention to the employment data than usual. If claims begin moving consistently higher, it would add to the evidence that the US labour market is starting to soften and make the case for another immediate Fed hike more difficult.

There is very little of significance scheduled for Thursday or Friday, so this should be a much quieter week from a data perspective. That does not necessarily mean exchange rates will remain quiet, particularly given the geopolitical backdrop and the fact that we are now moving further into October.

For Sterling, my view from last week hasn’t really changed. The Budget on 28 October remains the main domestic risk I am watching this month. GBP/EUR finishing last week above 1.1750 shows that there is still plenty of underlying support for the Pound, but GBP/USD in the low 1.32s also demonstrates how quickly individual currency pairs can move when the other side of the equation is strengthening.

I still think there is a reasonable chance we see some Sterling nervousness as the Budget gets closer and speculation around tax, spending and government borrowing increases. As I mentioned last week, that doesn’t necessarily mean I expect a negative reaction on Budget day itself. My base case remains that some of the uncertainty is priced in beforehand and, assuming the Government delivers a credible Budget without any major fiscal surprises, Sterling has the opportunity to recover once markets have something concrete to work with.

For this week, however, there is no point pretending we have a packed calendar when we don’t. The Fed minutes are probably the most useful release, particularly after Friday’s employment figures, but otherwise I expect attention to gradually start moving towards the bigger events later in October.

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