Good morning,
Donald Trump returned to the campaign trail in Pennsylvania, the site of his assassination attempt in July. The former president, defiantly used the event to reaffirm his resolve, claiming “a miracle” saved him. The Butler crowd, ever loyal, cheered as Trump recounted the dramatic attack, positioning himself as a symbol of resilience. With the 2024 election looming, Trump is leveraging this near-miss to energise his supporters and drive up turnout in key swing states. Meanwhile, Vice President Kamala Harris is zeroing in on Pennsylvania too, setting the stage for a high-stakes battle in a must-win state.
Last Week
The Middle East is on the brink of all-out war as Israel’s offensive against Iran-backed Hizbollah in Lebanon intensifies. This week saw Israel’s first ground incursion into Lebanon since 2006, following the assassination of Hizbollah’s leader. Tensions escalated further when Iran retaliated with a barrage of ballistic missiles targeting Israeli cities. This conflict has driven demand for safe-haven assets like gold, oil, and the US dollar. Brent crude surged 5% amid fears that violence could disrupt key energy infrastructure in the region, which accounts for about a third of global oil production. With no signs of de-escalation, markets will likely continue to respond to heightened geopolitical risk.
Sterling had a tough week, facing a double hit. Already overbought and vulnerable to a sell-off, it took a sharp dive after Bank of England Governor Andrew Bailey hinted at faster interest rate cuts. Bailey’s remarks sparked speculation that two quarter-point cuts could be on the cards this year, with markets raising the odds to 75% from 50%. The prospect of lower borrowing costs, combined with a broader market shift towards risk-off assets, saw sterling have its worst day since last October, falling more than 1% against the dollar. This marks a notable shift in sentiment for the pound.
The yen’s recent rally, which saw it gain 13% since hitting 30-year lows in July, has faltered in the past few weeks, cooling by nearly 4%. The primary driver of this decline is the appointment of Japan’s new prime minister, Shigeru Ishiba, who has taken a more dovish stance on monetary policy. Ishiba’s pledge to “decisively end deflation” and his assertion that further interest rate hikes are unnecessary have raised doubts among investors. Much of the yen’s summer strength was built on expectations of rate increases by the Bank of Japan, so Ishiba’s comments have cast uncertainty over the currency’s future direction. Markets will be closely watching how these policies unfold.
This Week
The US dollar continued its recovery this week, bolstered by Fed Chair Powell’s remarks that the central bank would likely proceed with quarter-point rate cuts but is “not in a hurry.” Stronger-than-expected data, including the ADP jobs report and ISM non-manufacturing PMI, further supported the greenback, while safe haven flows increased after Iran launched missile attacks on Israel. Looking ahead, the release of the Fed minutes on Wednesday is expected to reinforce expectations of gradual rate cuts. However, the key event will be Thursday’s US CPI data for September. With price pressures accelerating, especially in core CPI, investors will be watching closely for signs that could influence the Fed’s next moves, potentially driving further gains for the dollar.
The pound, the top-performing major currency this year, faced a setback after BoE Governor Andrew Bailey suggested that the central bank could become “a bit more activist” on rate cuts if inflation continues to improve. Markets now price in a 65% chance of a quarter-point cut in November, with a second cut expected in December. The next key test for sterling will come from Friday’s UK GDP data for August, alongside industrial production and trade figures. Weak results could reinforce Bailey’s dovish stance and push the pound lower. Traders will be watching closely for signs that the UK economy is losing momentum, which could lead to further declines in sterling.
Key events
Wednesday 9th October
12:00 New Zealand Cash Rate
Thursday 10th October
05:00 US FOMC minutes
23:30 US CPI numbers
Friday 11th October
17:00 UK GDP
23:30 Canadian Unemployment Rate & US PPI
Have a great week,
The Garton team.