Strong reports that Chancellor Kwarteng would announce a U-turn on taxation.

Euro-Zone consumer inflation increased to a fresh record high of 10.0% for September from 9.1% previously and above consensus forecasts of 9.7%.

The underlying rate also increased to a record high of 4.8% from 4.3% and above expectations of 4.7%.

The US core PCE prices index increased 0.6% for August after a 0.1% the previous month with the year-on-year rate increasing to 4.9% from 4.7% and above expectations of being unchanged at 4.7%.

Fed Governor Brainard stated that we are committed to avoiding pulling back on rate hikes prematurely and policy will need to be restrictive for some time to have confidence that inflation is moving back to 2%. She added that uncertainty is currently high and there are a range of estimates surrounding estimates of a Fed Funds peak. She added that it will take time for the full effect of tighter financial conditions to work its way through the economy.

In comments on Saturday, Swiss National Bank Chair Jordan stated that the franc is not highly valued despite the nominal rise, although he stated that he did not want to give significant guidance.

After Friday’s close, S&P cut the AA UK credit rating outlook to negative from stable which reinforced negative sentiment.

At Monday’s European open, reports indicated that there would be a U-turn on the planned cut to the higher rate of tax.

Sterling initially dipped sharply on Monday following the ratings warning, but then surged following strong reports that Chancellor Kwarteng would announce a U-turn on taxation and abandon plans to cut the top rate of income tax. This was officially confirmed by Kwarteng ahead of the European market open.

The Reserve Bank of Australia decision will be announced on Tuesday with consensus forecasts for a further rate hike of 50 basis points to 2.85%.

Forward guidance will inevitably be a key element for the Australian dollar.

There was choppy currency trading on Friday with significant month-end position adjustment adding to volatility. The Euro failed to gain support from the Euro-Zone inflation data. German unemployment increased 14,000 for September.

The US Chicago PMI index dipped into contraction territory. EUR/USD dipped to lows below 0.9735 before a solid recovery to 0.9800. EUR/USD settled just below the 0.9800 level on Monday.

Overall yield spreads undermined the yen. USD/JPY strengthened to 144.75 on Friday with highs around 145.20 on Monday before trading just below this level.

The Swiss franc dipped sharply on Friday with significant position adjustment. The franc regained some ground on Monday with EUR/CHF around 0.9660 and USD/CHF at 0.9865.

Sterling dipped into Friday’s New York open before recovery with an element of short covering with GBP/USD rallying to 1.1190 from lows below 1.1050. UK political and economic confidence remained extremely vulnerable with the S&P rating warning undermining sentiment. Confirmation of a U-turn on plans to cut the 45p tax rate triggered a fresh GBP/USD surge to highs above 1.1250 before a correction.

Dollar strength and weaker equities again undermined commodity-currency support before some relief on Monday. AUD/USD dipped below 0.6400 before a recovery to 0.6440 on Monday ahead of the RBA decision. USD/CAD posted highs to 1.3830 before a retreat to 1.3760 on Monday.

Economic Calendar

15:00USD ISM Manufacturing PMI52.552.8

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.