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The euro dropped today after inflation in the euro zone hit a record high, but was heading for a weekly gain on hawkish signals from the European Central Bank as some calm returned to foreign exchange markets at the end of a wild week.

Sterling was also lower as end-of-quarter demand boosted the dollar.

But it was headed for its best week against the US currency in two and a half years as the Bank of England waded into the debt market to buy gilts for a second day yestersday.

On Monday, the pound hit a record low as markets were rattled by the British government’s plan to slash taxes and pay for it with more borrowing.

Data today showed euro zone inflation zoomed past forecasts to hit 10% in September, a new record high that will reinforce expectations for another jumbo rate hike next month from the ECB. After several days of gains, traders took profit on the euro.

The euro traded at $0.9761, down 0.6%, after the release of the inflation figures, while the dollar index moved 0.5% higher but is on course for a weekly loss.

Sterling slips after fiscal watchdog meeting

Sterling slipped today, reversing earlier gains against the US dollar, after Prime Minister Liz Truss and finance minister Kwasi Kwarteng met Britain’s fiscal watchdog and confirmed markets would have to wait until November for new economic forecasts.

Truss and Kwarteng refused to bow to demands to publish earlier forecasts of government growth plans and the impact of planned tax cuts which have led to turmoil in the financial markets this week.

In a volatile session, the British currency edged 0.1% lower to $1.1112 after slipping as much as 0.8%.

It had touched a one-week high of $1.1235 in early London trading that took it close to erasing all of the steep losses in the aftermath of the new government’s fiscal plans announced last Friday.

The British finance ministry said in a statement after the meeting with the Office For Budget Responsibility (OBR) that independent economic and fiscal forecasts would be published on November 23rd.

The Conservative government has faced criticism for not commissioning OBR forecasts alongside last Friday’s fiscal plan, which rattled markets by announcing big tax cuts funded by borrowing.

Earlier, in a turnaround from the record lows the pound struck on Monday, and helped by emergency Bank of England bond buying, the British currency rose to the highest in a week.

It was still heading for its biggest weekly rise since mid 2020, but still set for its second deepest monthly drop since October 2016.

Chris Turner, head of markets at ING said the government “still has to find a way to balance the books and avoid a very negative assessment from the rating agencies”.

“A Conservative party conference this weekend suggests it is far too early for a U-turn on fiscal policy and, combined with a very difficult external environment, sterling should stay vulnerable,” he added.

FX volatility spike

Foreign exchange volatility has surged this week as investors worry about the pace of global monetary tightening and the UK mini-budget fallout, and while nerves calmed today, few analysts think it is over.

“As cross-market volatility pushes up to new highs for the year, credit spreads widen and the market reflects on a near-miss with a financial crisis in the UK pension fund industry, it is probably time to take even more defensive positions in FX,” ING strategists said.

In a sign of the rush for the safety of the dollar, demand for the US currency in derivative markets surged on Friday to its highest since the Covid-19 crisis in 2020.

So far this year, the dollar has soared 17% against rivals, including a 7.2% gain in the current quarter.

“We have seen some dollar selling into the latter portion of this week – but it feels like nothing more than some profit taking before another run to the top side, rather than any sign that the USD is actually topping out,” said Joel Kruger, market strategist at LMAX.

Elsewhere, China’s yuan today briefly recouped all of its losses from earlier in the week after Reuters reported the central bank had told major state-owned banks to be ready to support the currency in offshore trading.

The Swiss franc fell after the Swiss National Bank said it had intervened in the foreign exchange market in the second-quarter to support the currency. The dollar rose 0.4% against the franc and the euro was unchanged against the Swiss currency.

The dollar was unmoved against the yen at 144.47 and has been mostly tracking sideways below the psychological 145 line since Japanese officials stepped in to conduct their first yen buying intervention since 1998 last week.

Article Source: Euro falls after inflation data but heads for weekly gain – RTE

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