UK Inflation Hits a 40 year High – Daily Market Brief, May 18, 2022

After solid gains in the previous session, European bourses are set for a modestly positive start to trading on Wednesday, with the focus firmly on inflation.

·         UK CPI rises to 9% YoY in April, up from 7% but short of the 9.1% forecast

·         GBP/USD eases back from 1.25 following the slight miss, FTSE points to a firmer open

·         EUR/USD is steady after a 1% rise yesterday; eurozone inflation data is due

All three leading indices on Wall Street closed firmly higher yesterday, helped in part by solid retail sales data. Sales rose 0.9% MoM in April, showing that consumers kept spending despite inflation sitting at a 40-year high and consumer confidence dropping to an 11-year low. The data supports not only a solid rebound in Q2 GDP but also a more hawkish Fed. Following the data, Federal Reserve Chair Jerome Powell pledged to do whatever was necessary to bring the 4-decade high inflation back under control.

Asian markets failed to carry Wall Street’s gains, and stocks wobbled amid nagging doubts over inflation and rate rises and despite Japan’s GDP contracting by less than feared in Q1, -0.2%.

As Europe is heading towards the open the FTSE trades 0.1% higher and the DAX 0.18%.

UK CPI

UK CPI rose to 9% YoY in April, a jump up from 7% in March, which is not that surprising given the 54% energy price rise, higher food and fuel prices amid the fallout from the Russian war, and an 8% slump in the pound over the past few months.

The only positive from the data is that CPI came in slightly below forecasts of 9.1%, but that is little consolation when regular wages increased by just 4.2%, suggesting that the cost of living crisis is likely to worsen before it gets better. Core CPI came in at 6.2%, in line with forecasts and above 5.7% in March,

GBP/USD

GBP/USD is edging lower towards 1.2450 following the CPI slight miss and as bulls pause for breath following yesterday’s phenomenal rally. GBP/USD surged 1.4% in its best one-day rally since October 2020, following the jobs data yesterday, which revealed that the UK unemployment rate dropped to a 48-year low and that there are now more vacancies than people unemployed – a statistic that highlights just how tight the labour market is and bolstered the odds of the BoE moving faster to hike rates.

EUR/USD

EUR/USD rose a solid 1% yesterday after eurozone GDP was upwardly revised to 0.3% QoQ, showing that the economy expanded at the same rate that it did in Q4 last year, despite the Russian war fuelling supply chain disruptions, lifting inflation and hurting confidence.

The ECB’S Klass Knot said he would consider a 0.5% interest rate rise should the data support such a move. The mention of an outsized hike boosted the euro significantly.

Attention will now shift to Eurozone inflation data which is expected to confirm the 7.5% preliminary reading. Hot inflation could raise the prospect of a July rate hike and lift the euro.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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