Weekly Financial Markets Analysis by Lloyds TSB

Tentative signs of stability saw a degree of risk appetite return this week, however market confidence is still fragile and volatility remains significant.

Tentative signs of stability saw a degree of risk appetite return this week, however market confidence is still fragile and volatility remains significant. In the G10, the higheryielding Australian and New Zealand dollars saw the largest gains against the US$. This was in spite of further falls in commodity prices, with gold falling below $800 this week for the first time in a month and crude oil dropping to $69.85 – the lowest since August 2007. The pound rose against the US$ this week, boosted by data showing UK inflation rose to a 16-year high of 5.2% in September. However, despite briefly breaking through
1.76, £/$ eventually closed the week up 1.3% at 1.7258.

Against the euro, the pound closed 1.5% higher at 1.2829, while €/$ eased 0.2% to 1.3452. Downward pressure on crude oil prices saw the Norwegian krone post the biggest fall in the G10 against the US$ this week. $/Y closed the week at 101.4, rising from an intra-week low of 99.27. In emerging markets, there were sharp falls against the US$ for the Icelandic krona, South African rand and Turkish lira. The Hungarian forint was also under strong selling pressure on concerns about the domestic banking sector. The Brazilian real saw the
largest gain versus the US$ this week, swiftly paring back some of its losses from last week. In the UK, there was a timely reminder this week of why the Bank of England should remain very cautious about
aggressively lowering interest rates after data showed CPI inflation rose to 5.2% in September, from 4.7% in August. Although most forecasters now consider the peak in inflation to be close and anticipate a significant fall next year, the risk of second-round effects clearly still remains. However, concerns about economic growth
were also raised this week by disappointing UK labour market data, showing a sharp rise in the unemployment rate over the previous quarter and continued subdued earnings growth. We now expect the BoE to reduce interest rates by 0.5% to 4% next month or closely after, but further cuts should not be taken for granted.

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