Traders flocked to the safe havens, including gold, the Swiss franc and the Japanese yen, although equities held on to record highs and bonds traded largely sideways. The latest bout of hostility between Washington and Beijing cooled last week following some conciliatory rhetoric on both sides. Investors will be hoping for compromise, but the big unknown is whether the weaponising of China’s rare earths monopoly is a genuine shift in trade policy or merely a negotiating tactic. We suspect the latter, but markets remain unsure.
The drought in US data brought about by the federal shutdown will ease this week, as the September CPI report will be published on Friday. Economists expect yet another monthly print in the 3-4% range, far above the Federal Reserve target and an apparent contradiction with the central bank's increasingly dovish stance. UK inflation numbers for September will also be published on Wednesday. Friday promises to be a volatile day, as in addition to the US inflation report, the October PMIs of business activity will be released worldwide.
GBP
Labour market data out of the UK continues to point to clear signs of a cooling in conditions. The almost perpetual shedding of jobs appears to have halted over the summer, although another 10k net jobs were lost in September, raising the grand total since last year’s budget to an eye-watering 127k. This slowdown is consistent with the message from the monthly GDP numbers, which continue to show an economy growing at a modest pace of only around 1% on an annual basis. This is not at all sufficient nor encouraging if we consider that Britain is in the midst of one its largest population booms in decades, which means that the average person is now worse off in per capita terms.
The Bank of England faces a similar conundrum to the Federal Reserve, as labour market weakness coexists with inflation figures that are still significantly above targets. This week's inflation data is pivotal to the next moves in interest rates. The Bank of England seems to have little appetite for a full easing cycle as long as inflation remains closer to 4% than 2%.
EUR
The French government seemed to gain a parliamentary reprieve last week. Prime Minister Lecornu survived not one, but two no confidence votes, and it looks as though his budget now has a greater chance of passing than not following amendments. Market relief was tempered by the fact that this came at the cost of jettisoning its pension reform plans, which means an unfortunate delay to what we see as an essential increase to the retirement age. French sovereign debt received an unexpected credit downgrade over the weekend, but early Asian trading suggests that markets are largely ignoring it.
Having recently concluded its easing cycle, the ECB’s task seems simpler from here than that of the Bank of England or the Federal Reserve. Last week's upward revision in Eurozone core inflation is a reminder that the threshold for additional cuts remains very high. This should, we think, continue to provide some support for the common currency, particularly versus the US dollar.
USD
The lack of economic data due to the US government shutdown is forcing markets to perhaps overinterpret other developments, namely the rumblings of concern about credit quality in the US following a handful of high-profile blowups. So far, we see no systemic implications in these accidents, and credit spreads remain at very low levels in absolute terms. The macro backdrop (monetary easing in spite of high inflation) should be favorable to credit, but we are paying close attention.
We expect this Friday's delayed inflation data to show no further progress towards the Fed's target, with headline and core inflation both printing in the 3-4% annualised range. None of this is likely to stop the Fed from easing at each of its next two meetings, particularly given the uncertainty caused by the absence of fresh labour data. We could be waiting a while for the next clear read on the state of employment, with betting markets now expecting the current shutdown to be the longest on record.
Deep dives and expert insights:
- G3 FX Outlook - October 2025
- FX Talk: EP 115 (ft. Kallum Pickering)
