Market Report - 18/10/2023
UK CPI misses estimate in September ; Meanwhile Eurozone prices fall
UK inflation remained high, arriving without change for the month of September (6.7 percent) which matched the reading of August. Consistently high and rising prices halted months of progress towards the easing pressure on households. In it’s current state, Inflation is currently over three times above the Bank of England’s target of 2%.
Additionally, a price increase in petroleum has helped to keep inflation buoyant. Food and non-alcoholic beverages however saw large price decreases in inflation, the first monthly price decreases that have been seen since September 2021. It is also worth noting that prices for household goods and furniture increased less than a year earlier, showing some light at the end of the tunnel.
The Pound has edged higher following the data release, though it hasn’t exactly surged. Traditionally, GBP tends to react when inflation figures surprise to the downside which is what makes today's reaction unsurprising – yet the slight upward movement does provide some further confidence that 1.16 (GBPEUR) could be in sight.
Today’s UK inflation report however hasn’t had much impact on analyst expectations for next month’s interest rate decision however.
Interestingly, markets reflect a 78.5% chance that the Bank of England leaves its benchmark rate at 5.25% in November. This is an increase from the previous 76% estimate last night.
GBP/EUR rate rose steadily through the day, to reach highs of 1.1540 (at time of writing), whereas the GBP/USD continues to trade relatively cautiously - remaining stagnant at 1.2180, though highs had been seen around the 1.22 level.
Looking at the dollar, The EUR/USD rate remained low last week falling to around 1.0520 at the end of last week. Overall It appears as though the Euro is struggling to make gains against a firm level of support in appetite for USD. Early in October, the pair hit a low of 1.0447 and attempted to push higher once again; however recent events and increased appetite to buy safe-haven flows ultimately have helped to further demand for the US Dollar once again.
USD has been supported recently by two causes, neither of which was positive. First off, following the attack on Israel on Saturday by the Palestinian organisation Hamas, Israeli Prime Minister Benjamin Netanyahu declaring war on Sunday. As a result, the value of the US dollar increased at the weekly opening. The desire for safety however was driven by fears of a wider conflict in the Middle East, which has also contributed to a surge in government bonds and a decline in yields, which acted further as a catalyst into safe-haven flows (such as USD).
Looking ahead, we have US unemployment data releases int the diary tomorrow, along with a handful of FOMC speakers which analysts will be keeping a close eye on for fresh impetus. On the UK front, the main risk event for the remainder of the week is the release of UK Retail Sales which are due on Friday morning at 7am.
Later this morning, there was confirmation in the Eurozone that inflation fell in September. CPI rose by 4.3% in the prior 12 months, which was down nearly a percent from 5.2% in August. This means there was no change to the initial estimates, reaffirming a softening of price pressures in the Euro area.
In Denmark and Belgium prices rose by 0.6% and 0.7% respectively, whilst in the Netherlands prices actually dropped by 0.33% for the year. The highest contribution to the annual reading came from services, which was followed by food, alcohol and tobacco.