GBP

Signs that the gasoline shortages have peaked in the UK and increasing Bank of England hawkishness boosted the pound, which was one of the better performing European currencies last week.

Our view that a rate hike in the UK will happen before year end was supported by weekend remarks from two MPC members, including Governor Andrew Bailey, which sounded worried about the prospects of “very damaging” inflation. It is clear that a hike may be coming as early as the November meeting, which should lead markets to seriously reprice their rate expectations and provide a definite boost to sterling.

EUR

The key question in the Eurozone will be whether the impulse from the reopening and spending of the European funds will be enough to offset the weakness caused in the manufacturing sector by the worsening supply chain issues. We remain optimistic, but must admit that the balance of risks has shifted somewhat to the downside given the disproportionate impact of soaring energy prices on the European economy.

This week, August industrial production numbers are published, but we think the report is too lagged to have significant market impact, and the euro will follow developments elsewhere.

USD

The headline of the September labour market report in the US was disappointing, but the details were somewhat more encouraging. All in all, the job market recovery continues, albeit at a slower pace than the Fed would hope for, and probably not fast enough to expand supply fast enough to bring inflation down any time soon.

We should get confirmation for this from this week’s inflation data report. Markets are expecting yet another month with headline inflation above 5% and core inflation above 4%. The impact of another upward surprise in this data point is anybody’s guess, but lately the dollar has tended to underperform whenever market expectations of inflation increases.

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