UK CPI Sends GBP Lower

CURRENCY FUTURES

US DOLLAR: The USD index inched higher, supported by a weaker pound as the dollar hit its highest level in a week. Dollar strength this week has also been supported by optimism of a potential US-China trade deal after President Trump said he expects to reach a trade deal with China, although Trump has said that a meeting with President Xi may not happen. Trump shot down a request by Democratic lawmakers to meet until the shutdown ends. The standoff in Washington continues with no end in sight, complicating the path for the Fed at its meeting next week, although it is still expected to cut interest rates by 25 bps. Fed Funds futures are pricing nearly a 97% chance of a 25 bps rate cut in October and in December. Friday’s inflation data for September will grab market attention given the ongoing data blackout due to the shutdown. Inflation is expected to rise 0.3% in September to an annualized rate of 3.1%.

EURO: The euro slipped against the dollar as market attention shifts to speeches from some of the European Central Bank’s voting members this week, with President Christine Lagarde set to speak later this morning. Thursday will market the beginning of the bank’s blackout period, ahead of next week’s rate-setting decision. Markets have fully priced in a rate cut by the ECB for its July 2026 meeting. In recent weeks, political developments in France have caused the euro to slide, and markets appear reluctant to fully price out risk from France as budget talks appear fragile. S&P cut France’s sovereign rating to A+ from AA-, citing heightened fiscal risks and continued uncertainty surrounding government finances. PMI data for October from Germany, France, and the eurozone are scheduled for release Thursday and will be the highlight of the week on the European economic calendar.

BRITISH POUND: The pound fell following the release of softer-than-expected inflation figures in the UK. CPI inflation for September held at an annualized rate of 3.8%, showing no changes in September after rising 0.3% in August. The inflation figures came in below the expectations of economists and the Bank of England, who had expected a rise to 4%. Core inflation was also unchanged on the month, while the annualized figure fell to 3.5% from 3.7%, below expectations. Interest rate futures are now pricing a 75% chance that the BoE will cut interest rates to 3.75% by the December meeting, up from 46% before the release of the data. Investors continue to remain cautious ahead of November’s budget announcement, especially following data released on Tuesday that showed Britain’s borrowing in the first half of the tax year was the highest on record outside of the pandemic. The UK had borrowed more than it had planned to, cementing expectations that the government will next month announce fresh tax rises and some spending cuts in an effort to put a lid on its large debt. The figures added to expectations that Finance Minister Rachel Reeves will announce new taxes to help Britain rein in its debt.  Recent comments from Bank of England Governor Andrew Bailey have also weighed on the Sterling. Bailey recently warned that the UK’s economy is operating below potential and that the labor market is showing signs of softening. Bailey did note that the timing of future policy moves remains uncertain. PMI data on services and manufacturing activity will be out on Friday along with retail sales data.

JAPANESE YEN: The yen inched higher against the dollar. Expectations of expansionary fiscal policy in Japan following the election of Sanae Takaichi have led the yen to lose 2.5% this month. Investors believe Takaichi’s policies will bring greater fiscal spending and cloud the monetary policy outlook for the Bank of Japan. New finance minister Satsuki Katayama said on Wednesday that it is necessary for the government and the BoJ to coordinate to make economic and monetary policies effective. Meanwhile, Takaichi said on Tuesday that the specific means of monetary policy were up to the BoJ to decide. In the past, Katayama has signaled her preference for a stronger yen, which could give markets cause to rethink the idea of pushing the yen too low. Still, Takaichi’s support for increased fiscal spending and looser monetary policy gives markets reason to question the value of the currency. Inflation data out Friday is expected to show that price pressures remain elevated, with consumer prices excluding fresh food expected to rise 2.9% in September. The BoJ is expected to hold interest rates steady at its meeting next week. Elsewhere, trade figures showed that Japan unexpectedly posted a trade deficit in September as exports grew below expectations while imports rose far above expectations. Exports rose 4.2% on the year, the first increase since April, although below an expected 4.6%, as growth was supported by a weaker yen and a trade deal with the US. Imports rose 3.3% on the year, above an expected rise of 0.6%, reflecting an increase in household spending. Import growth is expected to continue on the back of stronger consumer spending, which could continue to put pressure on prices in Japan as a result.

AUSTRALIAN DOLLAR: The Aussie was little changed against the dollar as investors await updates regarding US-China trade talks. Optimism over US-China trade talks could see an increase in risk sentiment and move the Aussie higher, while a lack of progress may offer some headwinds. The Commonwealth Bank of Australia said an extension to the existing deadline of a trade deal was more likely than a comprehensive agreement. Elsewhere, focus will center around comments from officials at the Reserve Bank of Australia. Recent data showed that unemployment jumped to 4.5% in September, adding pressure on the RBA to lower its official cash rate. Governor Michele Bullock is scheduled to speak on Friday and will be a key focus for markets in a relatively light week on the economic calendar.

STOCK INDEX FUTURES

Stock index futures are little changed following the Dow’s record-setting session on Tuesday. Tesla and IBM will report earnings today in another busy day on the corporate calendar. The Dow gained yesterday on upbeat results for blue-chip companies. General Motors jumped 16% after raising guidance, Coca-Cola rallied 3.8% on steady beverage demand and benefits from its India bottling deal, and 3M rose 6.3% after topping estimates. Netflix tumbled more than 6% in premarket trading after its results were affected by a tax dispute in Brazil, while Texas Instruments fell 7.6% following a disappointing outlook. Tesla will report after the bell and will be the first of the “Magnificent Seven” to report earnings.

Inflation data out Friday for September will be the mainstay of data this week out of the US, given that the shutdown continues to delay the release of economic data. PMI data on US services and manufacturing activity will also be released on Friday. Markets will watch for clues on the labor market and how the shutdown has impacted demand from consumers.

INTEREST RATE MARKET FUTURES

Futures are little changed across the curve ahead of today’s 20-year bond auction. The 10-year yield fell for a third straight session, landing at 3.955% Wednesday morning, its lowest level since September of last year, as markets expect the Fed to cut rates at both its October and December meetings. Friday’s CPI report will be key for Treasury markets; inflation is expected to have risen 0.4% in September and land at an annualized rate of 3.1%. The Supreme Court’s ruling on the legality of President Trump’s tariffs, along with trade uncertainty and the government shutdown, has the potential to keep uncertainty high and lead to volatility in yields. Wednesday will mark the first day this week with any real catalyst to trading; bonds have moved higher in recent days as investors position themselves ahead of next week’s Fed meeting. Seemingly easing US-China trade tensions has also helped support bids for Treasurys.

The spread between the two- and 10-year yields fell to 50.20 bps from 51.20 bps on Tuesday, while the 2-year yield, which reflects interest rate expectations, edged higher to 3.459%.

Interested in more futures markets?  Explore our Market Dashboards here.