November 04, 2022

Daily Report 04/11/2022

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The final reading for the UK PMI services-sector index was revised up to 48.8 for October from the flash reading of 47.5, but overall business optimism was still at the lowest level since April 2020. The data failed to support Sterling and there were further sharp losses into the Bank of England policy decision.

The Bank of England increased interest rates by 75 basis points to 3.00% at the latest policy meeting which was in line with expectations. Two members voted against the decision with Dhingra voting for a 50 basis-point hike while Tenreyro wanted a 25 basis-point hike. The two dissenters were concerned that the economy was already weakening and were concerned over the risk of tightening too aggressively given the lags associated with monetary policy.

The bank warned that the economy was likely to be in recession for two years, although the more pessimistic forecasts were based on market rate pricing and these expectations have already declined since the report was prepared. The bank again pushed back against market expectations with comments that it did expect rates to increase further, but not too levels implied by markets. Bank Governor Bailey stated that he would make no forecasts but hinted that rate increases were likely to be capped around 4.0%. The dovish forward guidance triggered further Sterling losses with a slide against the dollar. The Euro also posted a strong advance.

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The Euro remained under pressure in early Europe on Thursday with the hawkish Fed rhetoric from Wednesday’s Powell press conference still boosting dollar demand. ECB officials suggested that the December policy decision would result in a further rate increase of 50 or 75 basis points. This is to try combat economic risk and Inflation the single block is experiencing.

Key Data 

9.30 AM ECB’s President Lagarde speech

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The final reading for the US PMI services-sector index was revised to 47.8 from the flash reading of 46.6. The ISM non-manufacturing index declined to 54.4 for October from 56.7 previously and below expectations of 55.5. There was a significant slowdown in business activity and new orders growth for the month with a small increase in order backlogs. There was a sharp decline in exports orders into contraction territory. The employment index dipped into contraction territory for the month while there was a small acceleration in inflation pressures for the month. The dollar edged lower in an immediate response to the data, but regained ground quickly and the Euro retreated sharply to 2-week lows before a marginal recovery. ECB President Lagarde stated that there were still ways to go in raising interest rates which provided an element of Euro protection. The latest US employment report is due for release on Friday with expectations of an increase in non-farm payrolls of around 200,000. The data will have to be notably weak to trigger a shift in Fed expectations, but the dollar did lose ground on Friday with the Euro amid a tentative correction.

Key Data 

12.30PM Nonfarm Payrolls(Oct) Exp 200k Prev 263k