IFX Market Report: Tuesday 11th October 2022

The Bank of England intervened again this morning by announcing an expansion of its bond-buying scheme in hope of restoring order in the Kingdom’s bond and gilt market. The Bank stated that “the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to U.K. financial stability.” It will expand its purchase of U.K. government bonds to include index-linked gilts from 11 October until 14 October. This is the second expansion of the Bank’s rescue package after Monday’s increase in gilt purchases daily limit.

The Bank of England is under immense stress, its mandate of keeping inflation around 2% is contradicted by the government’s plan to reduce taxes while increasing government spending to support households with soaring inflation. The government already backtracked last week on the scrapping of the 45p tax for the highest earners, but markets still await Chancellor Kwarteng’s detailed fiscal plan.

Despite the turbulent economic situation, the United Kingdom’s unemployment rate fell to 3.5%, its lowest rate since 1975. However, wages fail to follow with inflation and could lead to more strikes in the coming months as energy bills this winter will go up to £2500 for a typical household, from £800 a year ago.

France is already facing massive strikes from employees of Esso and TotalEnergies as three refineries are shut down as a result. Last Friday, 15% of the 11,000 service stations in France were facing difficulties, according to Olivier Véran, the government spokesperson. If some are forced to close because they are completely dry, most are facing partial difficulties on certain fuels – often diesel. However, the government can rely on strategic reserves. 18 million tons of fuel and oil are stored in the territory, the equivalent of 90 days of consumption. Some stations in the North of the country have started to be supplied. Distributors have also increased their imports from Belgium, Germany and the Netherlands.

In the United States, the Treasury Department has been working for months on a Russian oil price cap and intends to press ahead with its plan in this week’s IMF plan as the general assembly of the United Nations meets this week to discuss the war in Ukraine and the effect of sanctions on the Russian economy. OPEC+ decided last week to cut output of oil by 2 million barrels a day to push prices back, a move that angered the Biden administration amid rising fuel costs and approaching midterm elections.

Cable showed losses for the 5th consecutive day on Monday. GBPUSD opened at 1.1084 and closed at 1.1055.

EURUSD follows a similar trend as it opened at 0.9736 and closed at 0.9700.

GBPEUR saw small GBP gains. It opened at 1.1376 and closed at 1.1392.

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