Forex Today: Eyes on UK’s fiscal policy, Japan intervention amid a cautious start to the week

Here is what you need to know on Monday, October 15:

The US dollar sees a negative start to the week, mainly undermined by the extended recovery rally in the GBP/USD pair on UK political uncertainty. The safe-haven greenback ignores investors’ worries over China doubling down on its zero-Covid policy, aggressive Fed rate hike expectations and looming recession risks. In lieu of these concerns, the Eurostoxx futures are down -0.10% in early European trading, as traders question the 0.85% gain in the US S&P 500 futures. The Asian stock markets slid and the US Treasury yields remained depressed after Friday’s move higher.

Essentially, traders remained on tenterhooks with the UK chancellor to make a statement on a medium-term fiscal plan on Monday afternoon while Tory backbenchers plot to topple the UK PM Liz Truss’ government over the weekend. A group of senior Tory supporters of Rishi Sunak is planning to meet on Monday night for a dinner hosted by ex-Treasury minister Mel Stride, amid speculation that as many as 100 no-confidence letters have been submitted to Sir Graham Brady, chairman of the backbench 1922 Committee, per The Guardian.

Meanwhile, Labour Party leader Keir Starmer called on PM Truss to make an urgent Commons statement on Monday. The new chancellor, Jeremy Hunt, appointed after the sacking of Kwasi Kwarteng on Friday, spent the weekend trying to offer reassurance that the government had control of the economy. Further, Bank of England (BOE) Governor Andrew Bailey’s meeting with Hunt and the resultant encouraging remarks by the central bank chief helped GBP open the week with a big bullish gap.

Looking ahead the focus will remain on the UK gilt market after Friday’s sell-off, in the wake of the BOE’s end to the emergency bond-buying programme. Also, traders remain wary over the ongoing rally in the USD/JPY pair, which calls for an imminent intervention by Japanese officials. Many top Japanese officials, including the Prime Minister, crossed the wires earlier during the Asian session, reiterating their stance that they are ready to take necessary steps to avoid undesirable and rapid FX moves.

Within the G10 currency basket, EUR/USD is benefiting from broad US dollar weakness alongside sluggish yields while USD/JPY is consolidating at the highest level in 32 years near 148.80. Hotter US inflation-induced increased steeper rate hike expectations from the Fed continue to highlight the monetary policy divergence between the Fed and the ECB as well as that with the BOJ.

GBP/USD is preserving a major part of the intraday rally so far, holding above 1.1250 after a brief attempt above 1.1300. The pair opened 50 pips higher, digesting the weekend’s UK political developments.

Gold is struggling to extend its recovery from two-week lows at $1,640, despite a broadly weaker US dollar, as bulls remain cautious while below the critical $1,670 hurdle.

Bitcoin price is stuck in a tight range at around $19,300, lacking a clear directional bias amid a cautious market environment and a subdued dollar. Ethereum is challenging the upside above the $1,300 mark.