Nerves are frayed after the Bank of England’s efforts to simultaneously ease and tighten policy continue to sow confusion in bond and currency markets. After stepping up its intervention efforts on Monday, the central bank offered to buy £5 billion in inflation-linked bonds yesterday morning, but instability returned when Governor Andrew Bailey warned pension funds support would end on Friday, saying “You’ve got three days left. You’ve got to get this done”. A later Financial Times article, referencing interviews conducted prior to Bailey’s comments, added to the mixed messaging by suggesting that officials were considering extending relief beyond Friday – meaning that bond buying could continue even as markets brace for a 100 basis point rate increase at the next meeting. Yields climbed again this morning when policymakers issued a statement saying “As the Bank has made clear from the outset, its temporary and targeted purchases of gilts will end on 14 October”.

The pound is trying to stabilize, but is down roughly 18.5 percent this year as the dollar climbs and the country’s economic policy credibility erodes.

Data out this morning showed the economy contracting by more than expected in August, slumping as consumers reduced spending and manufacturers cut output levels. Gross domestic product shrank 0.3 percent in the month, suggesting soaring energy prices, tighter financial conditions and deteriorating sentiment levels could push the country into recession.

The euro, largely sidelined by the dumpster fire on the other side of the Channel, is trading sideways against the dollar. European Central Bank President Lagarde could provide some support when she speaks at an Institute of International Finance meeting in Washington this morning, but developments in energy markets – where officials are discussing how to implement a price cap on Russian supplies – remain more important for markets.

Canada’s loonie remains flightless, struggling to push higher even as oil prices stabilize. The dollar-Canada exchange rate seems to have established support around the 1.35 mark, but firm resistance doesn’t emerge until the low 1.40’s – where declines in 2016 and 2020 got bogged down.

The Japanese yen is trading near a new 24-year low, scraping 146.40 in interbank dealing as persistently-wide interest differentials force the exchange rate lower against the dollar. By smoothly breaching levels that previously triggered intervention, the move has shown that the Ministry of Finance is seeking to contain volatility, not defend a specific “line in the sand” – something that could open up the potential for further declines.

Minutes taken during the last Fed meeting will probably show officials remain willing to risk a recession as they try to bring rampant price growth under control. Talk of downside risks and spillovers has increased since the rate-setting committee convened in September, but most policymakers remain concerned about broadening inflation pressures and appear intent on raising rates well into restrictive territory. Markets expect another 75 basis point hike on November 2, with a gradual deceleration coming in the succeeding months as the central bank monitors incoming data.

Tomorrow’s September consumer price index number remains the biggest event risk on this week’s calendar – and in the currency markets, pre-release position adjustments are likely to obscure fundamental signals until the release occurs. Economists currently expect headline inflation to print around the 8.1 percent mark, down from 8.3 percent previously, while the core measure is seen rising to 6.5 percent from 6.3 percent.

Karl Schamotta, Chief Market Strategist