Next week isn’t too heavy with scheduled risk events but it seems price action will continue to be volatile in the face of US inflation pressures which keep building. The latest figures saw a sharp, short squeeze in stock markets and an intraday move which was one of the largest in recent history, but many are questioning how long this technical rebound will last, with the long-term downtrend still firmly in play. The Fed is determined to press ahead with further jumbo-sized rate hikes. All things equal, this should continue to underpin support for the dollar and hinder longer term moves higher in risky assets.

A 75-basis point rate hike is a done deal now for the November FOMC meeting. Another three-quarter point move in December, which would be the fifth in a row, is now given a 70% chance by money markets. The peak rate in the US is closing in on 5% so it is noteworthy in some ways that even though there is an underlying bid in the greenback, the bulls have not made new highs. New peaks are being seen in USD/JPY as it heads to 150. The pace of the ascent has picked up so watch out for more intervention by Japanese authorities.

We note that since the 1990s, gains of 20% or a little more over a 12-month period have been consistently where dollar strength has topped out. That said, there is still no real alternative to USD while global growth continues to lag behind with numerous headwinds across the globe. A strong dollar does mean more downside potential for gold, which could soon challenge cycle lows and strong support around $1614.

Self-made headwinds are apparent in the UK currently, with politics entwined with financial markets – never a good mix! The new U-turn by the Truss government and sacking of the finance minister has not seemed to have calmed the gilt market, so-called for being a source of stability in times gone by. Credibility is tough to gain in markets, and very easy to lose.

The end of the Bank of England intervention in the bond markets will be a focus next week. Whether a fresh market selloff forces policymakers to continue with this is a key question. High UK inflation figures are forecast with the core of particular interest as rate hikes could be expected to influence these figures the most. The ratings reviews for the UK by the S&P and Moody’s scheduled next Friday will add to the GBP volatility melting pot.

Major risk events of the week

16 October 2022, Sunday:

–China 20^th Communist Party Congress: This twice-a-decade gathering is likely to see current leader Xi Jinping reappointed for a precedent-breaking third term. China-watchers will be interested in who is tapped as the next premier and anticipate no significant policy changes, particularly to the zero-Covid strategy and curbs on China’s property sector.

18 October 2022, Tuesday:

–China GDP and activity data: Improvements in third quarter growth will see GDP up to 4.4% y/y from 0.4%. Government support measures are likely to offset Covid-19 restrictions. Industrial production and fixed assets investments should grow slightly faster in September compared to a month ago. But retail sales are forecast to soften due to ongoing lockdowns.

–ZEW Business Survey: German investor sentiment is likely to remain subdued as concerns over the country’s energy supply increasingly weigh on the economic outlook. Worsening expectations mean the economy could stagnate or contract in the second half of the year.

19 October 2022, Wednesday:

–UK CPI: The annual headline print is forecast to fall one-tenth to 9.8%. The core reading will be of particular interest as rate hikes could be expected to influence this the most. This reading is also expected to drop by one-tenth, to 6.1%. Petrol and used car prices will continue to act as a drag. Sterling weakness is seen keeping prices high with some predicting peak inflation at 10.8% next month.

21 October 2022, Friday:

–UK Retail Sales: Analysts believe this will be a key test of the resilience of consumer activity in light of the cost-of-living crisis, higher inflation and interest rates. The data will be impacted by the passing of the late Queen. Sales have contracted in every month bar one since the start of the year.