FX Update: UK budget statement a damp squib for sterling.

FX Trading focus: Autumn budget statement does nothing to inspire sterling traders. USD sideways. Interesting signal from possible next BoJ governor.

The Chancellor Hunt Budget statement yesterday was a damp squib for sterling, sparking virtually no market reaction. Still, a couple of observations. First, there was apparently no major pent-up further “relief trade” of note, as EURGBP poked beyond the lows of this week without finding additional sellers, just as UK gilts seem to have come full circle in pricing the change of fiscal stance from the Treasury, as UK yields are moving passively with US treasury yields in recent days. So no immediate fall-out, meaning that forward structural concerns will possibly be a slow-burn issue, perhaps aggravated by the accumulation of incoming data and/or BoE missteps. Beyond this fiscal year, which lasts until April of next year, Gilt issuance is now forecast somewhat lower than previous estimates after the updates on the Treasury’s intentions yesterday. But for the 2023-24 fiscal year, gilt issuance is set to balloon, according to the UK’s Debt Management Office. An analyst cited in a Bloomberg article (could only find on internal platform) said that net gilt issuance next fiscal year could come in over £250 billion, almost twice the previous record in 2011. In another article, some suggest that Chancellor Hunt may have a hard time even delivering the spending cuts he outlined in the statement – with the spending tightening only set to begin, conveniently, after the next election (2024 or before) in 2025. In short – no immediate reaction, but the UK’s woeful structural twin deficit challenges remain far from addressed for the coming few years. GBPUSD looks rich without a Fed reversal (way too early there…).

The US dollar is biding its time in a range after the huge sell-off that was mostly on the back of the October CPI release. If we get another couple of days or so of waiting for follow through lower in the greenback, the momentum will really have begun to seep out of the move. Still, the move was extensive enough to require a considerable rally indeed to argue that the USD bull market is returning. As I have noted, the next heavy hitting data points aren’t up until the November 30^th PCE inflation print, and then the jobs report on December 2 and November CPI on December 13^th. Next week does have a bit of a data drop and FOMC minutes all crammed into Wednesday, the day before the Thanksgiving holiday, where traditionally little trading takes place, Friday inclusive.

Chart: EURUSD
A huge break higher through 1.0100 in EURUSD was sparked by the hot October US CPI print last Thursday and we have closed every day this week within half a figure of the Friday close. A few days of consolidation is one thing, but if the pair doesn’t follow through higher in the coming couple of days, the move will have lost considerable momentum. Note the 200-day moving average that was touched earlier this week for the first time since June of last year, a remarkable run. That 1.0100 area is an important pivot, with the 61.8% retracement of this large rally wave not coming into until close to parity. To the upside, the next important zone is perhaps 1.0611 (the 38.2% retracement of the sell-off wave from the multi-year high at 1.2349 to the 0.9536 low for the cycle) and then the 2020 pandemic outbreak a tad higher at 1.0636.