Sentiment was unstable for most of the week and this was well reflected in rising cross market volatility. Intact uncertainty, related to the European banking sector, more muted growth expectations when it comes to China and the intensifying notion that the Fed will tighten monetary policy in December have been driving the latest developments. Elsewhere, fears over the likelihood that the UK may be heading for a hard Brexit continue, irrespective of UK PM Theresa May being ready to let parliament debate her Brexit plans.
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In an environment, in which global growth expectations fail to rise in order to compensate for falling liquidity expectations, caution should be warranted still when it comes to risk assets.
Next week’s ECB announcement is unlikely to change the outlook as such, especially as the central bank is no closer to considering a more aggressive stance, as already indicated by central bank President Draghi.
It must be noted too, that OPEC related expectations, when it comes to the announcement of an output freeze in November, are unlikely to rise further. This coupled with a stronger greenback may put an end to the last few weeks’ uptrend in oil prices, at least in the short-term. Should the above outlined conditions prove correct, further downside risks in commodity currencies such as the NOK towards the end of the year cannot be excluded This is particularly true as there is only limited room of further stabilising rate expectations.
The same holds true when it comes to the CAD. Next week’s BoC rate announcement is likely to confirm that growth and inflation remain subject to downside risks, and such prospects will keep rate expectations capped.
When it comes to GBP it cannot be excluded that the currency faces a period of stabilisation after having sold off towards multi-decade lows. Nevertheless, even if next week’s inflation, labour and retail sales data surprise higher, such an outcome is unlikely to prove a sustainable market driver, especially as the BoE links its dovish stance to long-term uncertainty.
In the US, the third Presidential debate is unlikely a game changer while September CPI is not expected to derail the December rate hike expectations. We believe that the rate outlook continues to put a floor below the greenback.