Pound rises even as inflation tops 11%

(Kenny Fisher – MarketPulse)

The British pound moved higher on Wednesday. In the European session, GBP/USD is trading at 1.1934, up 0.56%. The pound roared on Tuesday, gaining close to 1% and punching past the 1.20 line for the first time in three months.

It has been a busy time for the sterling, which has been marked by sharp swings that would make an exotic currency blush. The pound’s volatility has been especially pronounced in the month of November. The US dollar has hit a rocky patch and the pound has taken full advantage, climbing 3.5% this month.

It’s up, up, up for UK inflation

UK inflation continues to rise and hit a staggering 11.1% in October, a 41-year high. The upward trend continued despite the government introducing an energy price guarantee. Inflation jumped from 10.1% in September and ahead of the consensus of 10.7%. Core CPI remained unchanged at 6.5%, but was higher than the forecast of 6.4%. The Bank of England hasn’t been able to stem rising inflation despite tightening policy but will be hoping that its jumbo 0.75% hike earlier in November will take a bite out of the next inflation report.

The UK economy is facing a double-whammy of high inflation and a recession, and all eyes will be on Finance Minister Jeremy Hunt, who will announce the government budget on Thursday. Hunt will aim to restore the government’s credibility and stability, after the recent political soap opera which resulted in three different prime ministers in a matter of months and significant financial instability.

The UK employment report on Tuesday was lukewarm, with unemployment ticking higher to 3.5%, up from 3.4%. The Bank of England will be concerned about the increase in wage growth, which will create even more inflation. Wages excluding bonuses rose to 5.7%, up from 5.5% and ahead of the consensus of 5.6%. The BoE will be under pressure to continue hiking aggressively, even though this will hurt the struggling UK economy.

GBP/USD technical

GBP/USD has pushed above resistance at 1.1878. The next resistance is 1.2030.
1.1767 and 1.1660 are providing support.

The probable peak of UK Inflation

(Alexander Kuptsikevich – FxPro Financial Services Limited)

The UK Consumer Price Index delivered another “positive” surprise, adding 2% for October, above the average forecast of 1.7%. Annual inflation accelerated to 11.1% against 10.1% previously and the forecast 10.7%. Inflationary pressures are much stronger here than in the USA and China, which reported a stronger-than-expected slowdown last month but are in line with continuing escalating price tensions in Europe.

Producer prices are slowing their growth rate. PPI input prices added 0.6% m/m and 19.2% y/y against 20.7% a month earlier and peaked at 24.3% in June. From July to October, this index added 0.66%, suggesting an annulated increase of just under 2% – a decisive cooling, though not a price correction.

The PPI of producer price output slowed to 14.7% from 16.3% in September and a peak of 17.3% in July. For the three months, the index added 0.8%, reaching a trajectory of 3.3% in annulated terms.

Producer price development suggests that the following inflation report in November will show a deceleration of consumer price inflation. So, the current 11.1% y/y CPI could be the peak level for years.

Investors and traders are more concerned about how this will affect Bank of England policy and, thus, the British markets. It may not affect it because the BoE had earlier forecasted inflation beyond 11%, so inflation stays on the trajectory that the BoE envisages.

Anyway, the central bank’s comments will not be long in coming as there will be a hearing of its members in a special parliamentary committee later today. As these hearings coincide with the release of the new inflation data, the focus will be on this issue.

The Bank of England will likely highlight the work on rate hikes that started in November 2021 and hint at further hikes in the foreseeable future in increased increments of 50-75 points. It also cannot be ruled out that hawkish comments will accelerate the strengthening of GBPUSD into the 1.2200 area, from where we saw the start of the last peak in August. A decisive move higher would signify the markets’ belief that the UK is on the road to recovery, having avoided the worst-case scenario.

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