Week Ahead: Quiet calendar, but volatility and fear pick up

This environment is good news for the dollar which tends to strengthen in times of uncertainty. Indeed, some market commentators are now writing that there is no alternative to the greenback as it hits fresh two-decade highs. That does get us thinking about contrarian trades. But for the USD to weaken meaningfully, the Fed has to get more concerned about growth rather than inflation while other central banks need to both act and communicate forcefully. In the meantime, dollar strength has seen technical breakdowns in gold and oil which continue to look vulnerable.

One major central bank who didn’t pull the trigger on a bigger rate hike was the Bank of England. Sterling suffered after the MPC only hiked by 50bp last week, but then has crashed on Friday, losing over 3% in a move that left many market watchers gob smacked. We’ve only witnessed bigger one-day moves after Covid, Brexit and the GFC in 2008, and on Black Wednesday in 1992.

Markets are deeply concerned over the prospect of the UK increasing its already record-high debt-to-GDP ratio after the government announced billions of fiscal support and tax cuts not seen since the 1970s. Calls for parity in GBP/USD are now growing after prices traded with a 1.08 handle for the first time in 37 years. Options pricing gives dollar-sterling parity a 17% chance by end of the year. Cable is very deeply oversold on numerous measures, and we wonder if the Bank of England will be forced to step in with an emergency rate hike if the pound keeps on sinking.

Major risk events of the week

26 September 2022, Monday:

–IFO German Business Survey: Consensus forecasts a headline print of 86.0 from 88.5 in August. This would be the fourth month in a row that the survey has fallen. The August print was the lowest reading since June 2020. Fears of a recession in the third quarter, the Ukraine conflict and the ensuing energy crisis continue to weigh on business morale.

27 September 2022, Tuesday:

–US Durable Goods: Analysts forecast a reading of -0.1% after the same print in July. The pace slowed from the prior month pointing to a very moderate rebound in business spending in the quarter. Tighter financial market conditions and worries about a recession may impact going forward.   

30 September 2022, Friday:

–Eurozone CPI: Headline consumer prices are forecast to rise to a fresh all-time high of 9.7% from 9.1%. The core is seen picking up to 4.6% from last month’s 4.3%. Analysts say the effects of soaring wholesale gas and electricity prices will filter through to prices. This data is set to test the ECB as the economy falls into a recession while the euro sinks through key levels. Hawks especially will be concerned by the latter and will demand potentially bigger rate hikes going forward.

–US Core PCE: The Fed’s favoured inflation gauge is expected to rise two-tenths to 4.8% y/y. The monthly print is seen jumping to 0.5% from 0.1%. Price pressures remain broad-based though economists forecast goods inflation moderating in the coming months. The Fed sees the core PCE at 4.5% by year-end, easing to 3.1% in 2023. A lot of policymakers are slated to speak this week. They could confirm another big 75bp rate rise in November. This should further underpin support for the dollar.