Early Morning Call: GBP/USD at lowest level since decimalisation in 1971

Risk-off prevails in APAC

Risk-off sentiment prevailed in the Asia-Pacific region overnight, as investors reacted to Friday’s selloff in European and US equity markets and saw the dollar basket briefly rising above 114 in the early hours.

UK mini-budget

Sterling continues to lose ground against all major currencies as traders are still assessing the “mini-budget” unveiled by the Chancellor of the Exchequer, Kwasi Kwarteng.

GBP/USD hit an all-time low of $1.0322 overnight, falling as much as 5% on Friday’s close.

The FTSE 100 is starting the week higher paring some of Friday’s losses. The index dropped as much as 200 points after the presentation of the “mini-budget”, a hit three-month low.

Among the biggest fallers in Friday's session were energy and materials producer, a direct consequence of a weaker pound. BP PLC, Shell PLC, Glencore PLC (LSE), Antofagasta PLC and Anglo American PLC all fell in excess of 5%.

Macro overview

In Japan, the Jibun Bank Manufacturing PMI fell to 51 in September, from 51.5 in August. This is the 20th straight month of expansion in the sector, but the lowest since January 2021.

Services PMI rose to a three-month high of 51.9, from 49.5 in August, which meant that composite PMI climbed back to expansion territory at 50.9.

Markets await Germany Ifo business climate at 9am. Economists expect the index to fall for a third straight month in September, to 87 from 88.5 in August. The same goes for the other two indicators, current conditions and expectations, expected at 96 and 79 respectively.

This week will be a testing week for the DAX. German Gfk consumer confidence on Wednesday is expected to fall to a new record low in October. On Thursday, consumer price index (CPI) is forecast to jump to 9.5% in September, from 7.9% the previous month. And on Friday, retail sales in the country are anticipated to drop by 5.1% in August, twice the decline posted in July.

A couple of indicators are expected in the US: the Chicago Fed national activity index for August and the Dallas Fed manufacturing index for the month of September. The dollar is very likely to stay strong. Overnight the dollar basket set a new two-decade high, rising as high as 114.41.

Commodities

On Friday afternoon, WTI fell below $80 per barrel for the first time since January. The highest point last week for WTI was on Wednesday morning, hours before the Federal Reserve (Fed) raised Fed funds rates by another 75-basis points. Since the announcement, oil dropped as the dollar strengthened.

Last week was the fourth weekly decline for WTI and Brent, which was a first since November last year, and well on track for a fourth consecutive monthly decline, which hasn't happened since the first four months of 2020.

Last Friday, Baker Hughes total rig count rose by one to 764. That's 243 up on this time last year. The number of oil rigs in operation increased by three to 602, while the operational gas rigs fell by two to 162.

Dollar strength is also affecting base metals. Copper and zinc now trade at two-month lows. Aluminium ($5 Mini Contract) is at its lowest since March 2021.

LB showed signs of weakness in the second part of last week, after Fed Chairman, Jerome Powell, highlighted the imbalances of the US housing market, and has now gone through an important support level, back to levels not seen since July 2020.

Finally, a quick look at gold, which fell as low at $1,640 on Friday, its lowest level since April 2020.