Eurozone headline inflation reached a record high in October, The UK’s future prospects for future economic development, CHF is the second best performing currency for 2022
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Summary:
- Final headline inflation in the Euro Area reached a record high.
- Tax increases and spending reductions in the UK.
- CHF becomes the second best performer of 2022.
EUR/USD constrained by interest rate disparity
The market is reflecting mixed signals for this currency pair. Final headline inflation in the Euro Area reached a record high of 10.6% in October, just under the earlier estimate of 10.7%. Data from Eurostat show that the highest annual rate in October was for energy, which was at 41.5 percent (up from 40.7 percent in September), followed by food, alcohol, and tobacco, which had a rate of 13.1 percent (down from 11.8 percent in September), and non-energy industrial goods, which had a rate of 6.1 percent (compared to 5.5 percent in September).
As the post-CPI surge slows, the current gain in the EUR/USD has come to an end. The prices in the ultra-short end of the US bond market are stable even as market forecasts of a reduction in rate increases rise. The yield on a one-year US Treasury bill is approximately 4.66 percent, which is more than 250 basis points higher than the yield on a one-year German bond. Any short-term increase in the EUR/USD currency will continue to be constrained by this interest rate disparity.
EUR/USD Price Chart
GBP relying on Hunts credibility
The market is reflecting bullish signals for this currency pair. The UK's prospects for future economic development will be diminished by the tax increases and spending reductions, but a convincing autumn statement from Chancellor Jeremy Hunt might boost the value of the pound sterling. This is due to the fact that reputation will determine how the market responds to the fiscal event on Thursday. Hunt is expected to present a budget that will hinder development; however, the Pound's response will ultimately depend on how the market reacts to the credibility issue. Some analysts caution that while the Pound might gain from renewed confidence, its value could still drop if Hunt is overly bold and his recommended level of austerity becomes overwhelming.
EUR/GBP Price Chart
CHF could continue to strengthen
According to analysts at Nomura, the Swiss Franc has flipped the major currency league table on its head to become the second best performer of 2022. However, it could rise even further against the Pound and even have the potential to bring the GBP/CHF rate back to 1.0555 in the coming months. In the early months of the year, the Swiss Franc had given the Japanese Yen a tough fight for the bottom spot in the performance rankings of the major currencies, but a hawkish stance by the Swiss National Bank (SNB) and a supportive foreign exchange policy have reversed the previous order of performances.
The SNB has become open to buying back its own currency whenever market circumstances cause the Franc to weaken, even though it is still prepared to suppress the Franc if it appreciates too much for its tastes. This is because doing otherwise would raise Switzerland's inflation rate further.
GBP/CHF Price Chart
Sources: finance.yahoo.com, dailyfx.com, poundsterlinglive.com
