Pound licks wounds as uncertainty persists

GBP/USD bounces after government U-turn

Sterling recouped losses after investors found relief in Britain’s reversal on tax cuts. The original plan of a largely unfunded fiscal package had triggered a flight to safety. But buyers of Sterling-denominated assets were quick to return to the table after the government was forced into an awkward U-turn. Meanwhile, the BoE’s emergency intervention in the bond market offered some support. Temporary weakness in the US dollar also helped the pound regain all the lost ground. Still, few would bet on a sustained recovery of the pound as its fundamentals remain fragile. 1.1700 is a fresh resistance and 1.0400 a new low.

USD/JPY rallies over policy divergence

The Japanese yen softens as the intervention effect wears off. Its fall is yet to end against the backdrop of monetary normalisation on a global scale. Japanese authorities have signalled more willingness to defend their currencies. However, such measures may only have limited effect. Artificially popping up the yen would not be a game changer as long as the differentials in inflation and interest rates keep widening, and to the extent that US yields outperform Japanese ones. Instead, heightened volatility could further fuel speculative moves. The pair is still on its way to a 24-year high at 147.50. 140.50 is the closest support.

UK oil recovers on OPEC supply cut

Brent crude rose to a three-week high after OPEC+ agreed the largest output reduction since 2020. A cut of 2 million barrels per day just ahead of peak winter season may put a brake on the downtrend. The surprise decision comes at odds with major economies’ efforts to contain soaring energy costs. The White House may respond by releasing further strategic oil stocks ahead of the midterm elections in November. One major repercussion is that a resurgence in oil prices could dim chances of the US Fed pivoting to a slower pace in rate hikes. The commodity would climb towards 100.00 past 90.00. 76.00 is a fresh support.

US 30 weakens as Fed committed

The Dow Jones 30 struggles as a strong US labour market would support the Fed’s hawkish stance. A drop in US yields following a slowdown in the US manufacturing sector in September briefly eased the downward pressure on risk assets. However, the central bank is widely expected to raise rates and keep them in restrictive territory for a while. Portfolio rebalancing in a high interest rate environment is likely to weigh on equities. After all, why would investors risk their skins for stock alphas when the bond market can return 4% a year? The index bounced off 28700 and is testing the former support at 31100.