Week Ahead:  UK Leadership Battle & ECB In Focus This Week

Weekly Recap

We have several key developments this week, chief among them another dramatic shift in the UK political landscape. UK PM Liz Truss announced her resignation on the back of yet further government chaos as Home Secretary Suella Braverman resigned her post a day earlier. The Truss government has been marred with difficulty following a disastrous mini budget in late September which saw GBP plunging to record lows against the Dollar leading to Truss firing Chancellor Kwarteng. The Conservative party now embarks upon a fresh leadership contest to select a fourth, new leader, in as many years, by next Friday. 

Markets have been rife with speculation this week that the BOJ will be forced to intervene in currency markets once again following yet further declines in the Yen. Japanese officials this week, including Fin Min Suzuki, have warned of further action if speculators continue to push JPY lower. However, the BOJ seen clinging to ultra-loose monetary policy, speculators appear to be betting that any further such interventions will prove non-effective. The latest CPI figures for Japan this week showed inflation hitting 8 year highs last month, putting further pressure on the BOJ to tighten. 

Amidst a quieter data week where focus has mostly been elsewhere, the US Dollar underwent something of a renaissance to rebound from initial weakness and trade higher into the end of the week. A steady stream of hawkish commentary from Fed members, along with increased safe haven inflow as stocks fell, has seen USD bouncing back. 

Equities markets, and the broader risk complex, have come back under pressure this week. Despite a mostly positive set of US earnings this week, warnings over Q4 performance and fears of a recession are taking their toll on higher yielding assets. With central bank tightening and rampant inflation underscoring growth fears, risk assets look vulnerable to further downside. 

Coming Up This Week

UK Leadership Contest

Following the PM’s resignation, new PM hopefuls have until Monday to secure a minimum back of 100 MPs to become leader. If more than one candidate achieves this support, the party as a whole will have until Friday to vote for a new leader who will then become the new UK PM. GBP was seen lower on the back of Truss’s resignation and looking ahead, the market impact of this contest looks fraught with downside risk. Probably the best outcome for GBP would be a Sunak win, given he is deemed the most competent and most likely to shore up the economy. However, with markets already looking ahead to a general election, GBP upside looks limited near-term as political uncertainty looks set to remain. 

Apple & Big Tech Earnings 

In terms of US earnings, we have some major names on deck this week, headlined by Apple. Along the week we’ll see earnings from the likes of Twitter, Microsoft. Spotify, Alphabet and more. Earnings so far have been largely positive, however, tech earnings will be closely watched given the sell-off we’ve seen recently with any downside surprises set to drive the sector sharply lower, particularly if USD continues higher near-term. 

ECB October Rate decision

The ECB rates meeting will undoubtedly be the headline event of the week. On the back of the recent 75bps hike seen last time around, the market is now forecasting a further such increase this month. Inflation still remains around record highs in the eurozone and with consumer prices likely to remain pressured to the upside going forward as a result of the Russia-Ukraine war, traders are expecting a firmly hawkish meeting this month. 

Forex Heat Map 

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Technical Analysis

Our favourite technical chart of the week –  EURJPY

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EURJPY has made big moves this week once again and is now fast approaching a key resistance area at the 149.36 level where we also have the bull channel top. If price stalls here, we may well see a corrective move lower back towards the support level around 137.36.  However, if price breaks through resistance, there is room for a continuation towards the 160.70 level next. 

Economic Calendar

Plenty to keep an eye on this week data-wise, with the latest BOC and ECB rate decisions among other key events and releases. See the calendar below for the full schedule. 

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Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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