This morning saw GBP fall against the Euro but rise versus the Dollar, following another strong UK inflation print which suggested the Bank of England could not yet afford to quit its interest rate hiking cycle.
Such an outcome would generally support the Pound, but as has been the case recently, markets could now view stronger-than-expected inflation as a negative, as surging prices and interest rates would damage the UK's economic growth potential.
Data this morning showed that Headline CPI inflation was at 11.1% year-on-year in October, as it accelerated past September's 10.1% and easily beat a consensus estimate for 10.7%.
Low-income households suffered the biggest jump in the cost of living, while high income households were less hit. This is because low-income households spend more of their money on energy and food – where costs have soared.
The poorest 10% of households were hit by a 12.5% rise in their living costs – more than the average of 11.1% – while the richest 10% experienced inflation of 9.6%. The poorest 30% of families all experienced the highest inflation. The ONS reports that the gap between low- and high- income household inflation rates is the largest since March 2009.
Key points from todays data release:
UK Inflation rises to highest level since Oct 1981 - 11.1%
Food and drink prices rise by 16.4% year-on-year, biggest increase since 1977
According to the ONS, Inflation would've been at 13.8% if not for the Energy Price Guarantee
GBPUSD has failed to take large strides forward, despite trading up slightly on the day, following the hot UK inflation data early Wednesday. As a result, the pair has gone into a consolidation phase around the 1.1900 mark. The technical outlook suggests that sellers remain on the sidelines but the pair could find it difficult to gather bullish momentum unless it flips 1.1900 into a support level.
Following the Bank of Englands decision to hike its policy rate by 75 basis points (bps) on November 3rd, Governor Bailey noted that the policy rate will have to go up further yet again, but mentioned that the terminal rate is likely to be lower than what is priced in markets.
In case Bailey reaffirms that stance even with the stronger-than-expected CPI data, the GBP could find it difficult to gather strength. Nevertheless, market participants could refrain from making large bets before the UK Autumn Budget is unveiled on Thursday from Parliament.
EURUSD made lost some of its momentum yesterdat evening and dropped below 1.0300 after having reached its highest level since early June at 1.0480 in the American session on Tuesday. With risk flows returning to markets early Wednesday, however, the pair has regained its traction and climbed back toward 1.0400.
The softer-than-expected Producer Price Index (PPI) print from the United States (US) triggered a USD sell off on Tuesday and fueled EURUSDs rally in the early afternoon. Toward the end of the American session, reports of two Russian-made missiles hitting Poland, near the Ukraine border, forced investors to move away from risk-sensitive assets and helped the USD stage a rebound.
On the economic calendar today, investors will be keeping an eye on the Retail Sales data from the US. Markets expect sales to rise by 1% in October from $684 billion in September.
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