First Light News: RBNZ Hawkish Cut Bolsters NZD; UK Budget Eyed

This dovish shift from odds of around 30% follows a raft of Fed speak, a weakening jobs market, persistent inflation, and signs of lacklustre consumption.

US September wholesale inflation picked up pace as expected, with YY and MM headline prints increasing by 0.3% and 2.7%, respectively. September retail sales data came in slower than expected, moderating to 0.2% from 0.6% in August, with ex-autos also slowing to 0.3% from 0.7%. More tellingly, the US Conference Board’s consumer sentiment gauge tumbled to its lowest level in seven months, with forward expectations for the next six months now at their weakest since April. The cautious tone suggests downside risks to the labour market potentially outweigh lingering inflation concerns.

Per the USD Index, the buck ended yesterday’s session 0.4% lower, following three consecutive days of little to no change. As of writing, the Index is down 0.1% and attempting to find acceptance south of the 200-day SMA. For Stocks, major US benchmarks ended another day on the front foot. The S&P 500 added 0.9% to 6,766, and the Nasdaq 100 gained 0.6% to 25,018, with the Dow Jones Industrial Average rallying 1.4% to 47,112.

RBNZ Calls Time on Policy Easing

We also got an update from the RBNZ, which delivered an expected 25-bp rate cut, lowering the official cash rate to 2.25% from 2.50%. However, accompanying guidance was more hawkish than expected, hence the solid bid seen in the NZD.

According to the minutes, this announcement was not about whether to cut by 25 or 50; it was more about whether to cut by 25 or hold. This – coupled with optimism surrounding the inflation picture, growth, and the jobs market – as well as the updated rate path, suggests the easing cycle could be done and dusted following 325 bps of cuts.

Following the announcement and guidance, a picture-perfect setup to trade out of this event presented itself on the M5 AUD/NZD timeframe. As shown below, price tunnelled through a clear-cut QM support at NZ$1.1459 and retested the base as a resistance – a textbook scalping opportunity that highlights why it pays to be prepared ahead of these key releases.

Markets Gearing Up for the UK Autumn Budget

Let’s be honest, unless you are the UK Chancellor Rachel Reeves or involved behind the scenes, you – like me and everyone else – do not know where we are heading with the Budget, which is expected to air at around 12:30 pm GMT. As traders, the best we can do is plan for the most likely scenarios.

For the life of me, though, I cannot recall a Budget that has been preceded by such uncertainty, much of it caused by what I thought was a rather shambolic and unusual pre-Budget briefing and a few U-turns along the way.

Alongside this, we have UK growth stalling to almost nothing, inflation nearly double the BoE’s 2.0% target, and a cooling labour market. Additionally, BoE rate pricing suggests the central bank will push ahead with a 25-bp rate cut next month (21 bps priced in), as it is widely expected that BoE Governor Andrew Bailey will side with the doves this time, given the recent softer-than-expected inflation numbers.

Frankly, Reeves is in a real bind, attempting to raise £20 to £30 billion to repair the nation’s finances without triggering either an economic downturn or a Gilt market revolt.

If she increases taxes by too much, it could further stifle economic activity, potentially opening the door for additional BoE rate cuts and pressure on the GBP.

However, if she fails to raise enough money, investors may panic, and, as I mentioned in a previous post, ‘likely steepen the yield curve – expectations of a BoE rate cut will weigh short-end rates down, and the long-end will remain elevated on fiscal credibility concerns’.

While I could be wrong, whichever way you look at things, there’s not much to be cheery about regarding the GBP at this point.

Written by FP Markets Chief Market Analyst Aaron Hill