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Global market watch - 15th October 2021

Sterling hit a two-week high yesterday against the USD and a 19 month high against the EUR, adding to Wednesday’s gains, as traders focused on hopes that a post-Brexit trade war with the European Union will be avoided and on expectations that the Bank of England will raise rates this year. We know that one of the major reasons that BoE governor Andrew Bailey has favoured a rate hike is to prevent inflation from becoming permanently embedded. That being said, yesterday we had BoE policymaker Silvana Tenreyro say that raising interest rates to tackle a short-term or transitory inflation bump could be counterproductive. As such investors are closely watching for any signs that the markets may have got ahead of themselves in pricing a rise in British interest rates before the end of the year. This uncertainty creates more relevance for having a hedging strategy in place as there is still no definitive clarity on what will happen. In addition, although the markets are positive that a trade war with the EUR will be avoided, Britain’s negotiations with Brussels to ease the transit of goods to Northern Ireland and general post-Brexit tensions could still potentially limit GBP’s upward movement.
There is no key data out from a Eurozone perspective today. The focus will likely be on the negotiations surrounding the flow of goods into Northern Ireland.
The US dollar headed for its first weekly decline versus major peers since the start of last month, falling back from a one-year high as traders turned their attention to when the U.S. Federal Reserve will start raising interest rates. There has also been a general improvement in market sentiment, which has lifted global stocks, commodity prices and bond yields. As such we have seen a ‘Risk On’ mentality within the money markets and a flight away from the safe-haven US dollar more generally. We have US Retail Sales data at 1.30pm UK today which will be the next key test of the US economy’s health at present.

The headlines have been focussed on China in recent days as the stress in credit markets keeps worsening and the downward pressure on growth has continued. The Chinese government is soon expected to start to roll our new stimulus measures to take these concerns but so far nothing has been confirmed. The markets will be watching for any news on this front.

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