GBP/USD struggles after UK inflation jumps to a 41-year high – Daily Market Brief, November 16, 2022

UK CPI surged to 11.1% YoY in October, up from 10.1%, piling pressure on the BoE to hike interest rates again. GBP/USD struggles to find demand.

·         US PPI drops to 8% YoY, adding to evidence that inflation is cooling

·         NATO to investigate after Russian missile hits Poland

·         US retail sales are expected to rise 1% MoM in October; the USD is unlikely to see a big reaction

Europe and Wall Street booked decent gains yesterday, helped higher by mounting signs that inflation in the US is cooling. US PPI slipped to 8% YoY in October, down from 8.4%.

The FTSE was an outlier, underperforming its peers, closing 0.2% lower owing to a stronger pound, as GBP/USD rose to a peak of 1.2025. The pair rallied to a three-month high as UK wages jumped by the most in almost a year, adding to inflationary pressures.

In the US, stocks closed off their highs after reports that a Russian missile hit Poland, a NATO member. Early indications suggest that the rocket was knocked off course by Ukraine. US officials have urged caution while a detailed investigation is carried out. The news has dampened the market mood, given that a deliberate attack against a NATO country could prompt a counter-response from all member countries under Article 5 of the NATO agreement. In Europe, bourses are pointing to a mixed start.

The DAX is set to open -0.2% lower, the CAC to rise +0.04%, and the FTSE +0.1%.

UK inflation

While US inflation is showing signs of cooling, the inflation picture in the UK is less encouraging. UK inflation jumped to 11.1% YoY in October, a 41-year high, up from 10.1% and ahead of forecasts of 10.7%. Food and energy prices remain the biggest drivers of inflation.

With inflation over five times, the BoE’s 2% target pressure mounts on the BoE to hike interest rates again in the December meeting. Expectations are for another 50-basis point hike taking the rate to 3.5%. While the BoE said it expects inflation to peak at 11%, there are few real signs of consumer prices slowing, which is unnerving the market. GBPUSD fell following the release and trades towards 1.1850.

The data comes ahead of the Chancellor’s Autumn Budget tomorrow, which is expected to slam the breaks on growth and intensify the squeeze on household incomes. The hit to demand should start to slow inflation.

US retail sales

Looking ahead, US retail sales are due to be released. The US consumer has proven resilient throughout the year despite the high inflation and rising interest rate environment. Sales are expected to rise 1% MoM in October after coming in flat in September. 

The USD has been broadly under pressure since last week’s CPI data, and strong retail sales are unlikely to have a meaningful impact on the trajectory of the USD. That said, weak sales could trigger a “bad news is good news” response, boosting stocks.

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.

Sources: Bloomberg, CNBC, Reuters

Original article provided by Trading Writers

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