EUR (1.051) ▬

• After depreciating to below the 1.05 level against the USD due to a deteriorating domestic economy and hotter-thanexpected US macroeconomic data, the EUR soared to above 1.06, driven by rising eurozone inflation expectations and a correction in the US Treasury 10-year yield. However, the gains made by the EUR were short-lived, as they were dampened by an upside surprise in the US CPI report.

• Despite European Central Bank (ECB) President Lagarde's statement that "officials will raise interest rates again if they have to", the markets are still pricing in a near-zero chance of another rate hike by the ECB. Moving forward, the EUR may continue to be influenced by both eurozone and US macro readings. Any indications that the ECB might cut rates before the Fed does could spell trouble for the EUR. Beyond the USD factor at play, the bloc's currency may also face pressure due to the ongoing economic weakness in China.

GBP (1.214) ▼

• The Bank of England's (BoE) decision to end its streak of 14 straight interest-rate increases, prompted by the drop in UK's CPI to 6.7% YoY (Consensus: 7.0%), dragged the GBP to hit an almost seven-month low of 1.206 on Oct 3. This, coupled with the persistent strength of the US labour market and increased demand for the safe-haven USD due to the Israel-Hamas conflict, have further weighed on the pound.
• While the Fed is unlikely to raise rates at their November meeting, the 'higher-for-longer' narrative remains intact. This may continue to drive demand for the USD, exerting pressure on the pound, as the market expects the BoE to maintain the policy rate at 5.25%. However, the decision still hinges on this week's release of inflation and job figures. Investors may also want to examine the UK's 3Q23 GDP data to assess the risk of a recession in the UK.

Source: Kenanga Research - 16 Oct 2023