GBP Rally Continues
The British Pound is on the front foot again this morning following a bumper set of inflation figures for October. GBP was already seen well bid this week in response to yesterday’s labour market readings which saw the UK unemployment rate falling back to its lowest levels since late 2017. Heading into this morning’s release, expectations were already geared towards a higher reading given the supply issues and energy crisis which took centre stage over October. Consequently, the market was looking for headline inflation to rise to 3.9% from 3.1% prior with core inflation forecast to rise to 3.1% from 2.9% prior. However, both readings came in well above expectations at 4.2% and 3.4% respectively. The headline level of inflation is now sitting at its highest level in almost 10 years.
Energy Crisis Impact
Looking at the breakdown of the data, the largest upside contributions came from the increase in energy price, with gas bills higher by 28.1% and electricity bill sup by 18.8%. Petrol prices at the pumps were also firmly higher, averaging 138.6p per litre. At this level petrol prices are at their highest point since September 2012 and are up over 25p from last year alone.
As a result of higher fuel prices, transport costs were also seen higher along with used car prices which also rocketed higher over the month. The report notes that this is linked to increased demand from peoples seeking an alternative to public transport as a result of resurgent COVID fears. Cumulatively, used car prices are now almost 30% higher since April.
BOE Back In Focus
This latest inflation data, along with yesterday’s labour market data, puts an even greater focus on the BOE to act, with many critics suggesting the bank should have taken action at the November meeting. Still, market pricing now reflects around a 70% likelihood of the bank taking action in December. BOE governor Bailey has previously signalled that should inflation continue to rise, the bank would be forced to take action. While September’s decline to 3.1% from 3.2% likely afforded the bank the slightest of scope this month, the latest inflation data calls for urgent action. As such, GBP is likely to remain well bid heading into the December meeting.
Technical Views
FTSE
The rise in GBP and expectations that the BOE will tighten are obviously headwinds for UK asset prices. The FTSE is currently correcting lower from the move above the 7362.6 level, with MACD having turned negative and RSI pointing lower. The key area to watch is the local rising trend line and the 7241 level. A break below here will be a firm bearish development, turning focus to a test of 7137 next.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.