High Inflation Props Up GBP In A Dovish Environment

Financial markets again saw a wobbly week that started well and ended on shaky trading. US markets rebounded on Monday from the prior Friday's sell-off, only to be pegged back on Tuesday amid President Trump's escalation with China over rare earth export controls. Midweek, sentiment steadied as investors sifted through megabank earnings, but Thursday brought renewed stress as regional banks disclosed issues with bad loans.

Currency markets mirrored the shifting macro narrative. The US dollar initially caught a bid on risk-off impulses, before softening following dovish signals from the Federal Reserve. Safe havens, including the Japanese yen and Swiss franc, drew inflows during the regional bank scare, while EUR/USD stabilized as U.S. yields eased. The offshore yuan weakened on the rare earths headlines before steadying alongside broader risk sentiment.

Given the US government shutdown, FED Chair Jerome Powell’s remarks in Philadelphia were the pivot point. Powell warned "the downside risks to employment have risen," and noted there is sufficient evidence of labor market cooling even with official BLS data delayed by the government shutdown.

He reiterated that longer-term inflation expectations remain "aligned with our 2 per cent goal," despite tariff-related import price pressures. He signaled openness to another quarter-point cut at the October 28–29 meeting.

Powell also said the Fed could halt quantitative tightening "in the coming months," acknowledging the balance sheet is likely to remain structurally larger than pre-pandemic levels given higher demand for reserves and non-reserve liabilities.

Pairs In Focus

AUD JPY

After a full week of pulling back, AUD /JPY has found a footing at previous support and a lower trendline. The confluence, which marked a higher low following a higher high, is a signal that this pair might be ready to continue the bullish movement.

AUD / JPY daily chart, Source: TradingView

A short-term target would be the high from November 2024, around 102.

GBP SGD

The British pound has seen a recent resurgence, gaining ground against almost all currencies. After an early-year rally, it has remained in a sustained range against the SGD. However, building a multi-month base mandates a closer look.

GBP/SGD daily chart, Source: TradingView

A confirmed breakout would likely bring the pair toward the previous high of 1.76.

Looking Ahead

In the absence of the US fundamental data, Canadian and UK inflation will take center stage this week. In that regard, the Canadian economy has done well, as inflation declined to around 3%, with a negative trend. Meanwhile, the UK has seen a resurgence in inflation, which is expected at 4%.

This fact, which is keeping the Bank of England off the rate cut trigger, is likely a major contributor to the strength of the pound.

Disclaimer: Any opinions expressed in this article are not to be considered investment advice and are solely those of the authors. Singapore Forex Club is not responsible for any financial decisions based on this article's contents. We provide research and promote forex trading in Singapore, and readers may use this data for informational and educational purposes only.

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