Sterling rallied strongly as UK bond markets stabilised with bargain hunting kicking in.

German consumer prices jumped 1.9% for September compared with expectations of a 1.3% increase while the annual inflation rate jumped to a fresh record high of 10.0% from 7.9% as the ending of transport subsidies put strong upward pressure on prices.

The German government announced a support package of up to EUR200bn to subsidise energy prices which will be paid for, in part by a levy on energy producers. The government insisted that it would not be engaging in a wider expansion of fiscal policy.

Euro-Zone inflation data will be released on Friday with consensus forecasts for a fresh record high at 9.7% from 9.1%.

Cleveland Fed President Mester stated that the Federal Reserve was not at a point where it should think about stopping rate hikes with the bank not even in restrictive territory. St Louis Fed President Bullard stated that inflation will begin to fall in 2023, but how quickly is unknown.

Government sources indicated that the first estimate of the OBR fiscal forecasts will be available on October 7th with a full forecast by the end of October. The timetable provided an element of relief to UK markets.

The move to bring forward OBR forecasts provided an element of reassurance and also helped trigger a round of bargain hunting on valuation grounds.

GBP/USD surged over 4 cents from lows on the day to a 1-week peak at 1.1200 before dipping again.

The US currency posted significant net losses on the day as the Euro also engaged in a strong round of short covering.

Significantly, the dollar retreated despite the slide in equities and the dollar index retreated to a 1-week low.

China’s manufacturing PMI index edged back above 50.0 for September from 49.4 previously, but the non-manufacturing index retreated on the month and the Caixin manufacturing index dipped to 49.5 from 48.1 which maintained reservations over the outlook.

There will be further month-end and quarter-end position adjustment on Friday which will contribute to further very volatile trading conditions during the day, particularly around the London fix.

Euro business and consumer confidence deteriorated again for September with further unease over the outlook. The energy support package provided an element of relief in markets. ECB council member Rehn stated that rates should increase 50 or 75 basis points at the October meeting.

The dollar was subjected to a sharp correction with short covering for the Euro and Sterling. EUR/USD rallied strongly to highs at 0.9840 before a slight correction. US yields edged lower which limited scope for further yen selling, but with some losses on the crosses. USD/JPY settled close to 144.50.

The Swiss franc lost ground despite weaker equity markets. EUR/CHF rallied to 0.9570 with USD/CHF around 0.9760 on Friday.

Sterling rallied strongly as UK bond markets stabilised with bargain hunting kicking in. UK second-quarter GDP was revised to a 0.2% increase from the previous estimate of a 0.1% decline. GBP/USD surged to 1-week highs at 1.1200 before a retreat to 1.1120 on Friday.

There was choppy trading in commodity currencies with weaker equities curbing support. Canadian GDP increased 0.1% for July compared with expectations of a marginal decline. USD/CAD settled just above 1.3700. The weak Chinese Caixin PMI manufacturing index dampened Australian dollar support. AUD/USD consolidated below the 0.6500 level with Chinese data dampened losses.

Economic Calendar

13:30Core PCE Price Index m/m0.5%0.1%

*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.