We saw another decent session for markets in Europe yesterday, after US PPI followed CPI last week in coming in lower than expected, although the FTSE100 underperformed after the pound briefly surged to the 1.2000 level against the US dollar.
US markets also underwent another solid session however the gains were tempered somewhat by reports that two Russian missiles had landed in Poland, killing two people in the process.
Russia has denied the allegations; however, the incident has raised the temperature given Poland is a member of NATO, and a deliberate attack could prompt a counter-response from other NATO members under article 5 on mutual defence.
As a result of this elevated uncertainty, and the ongoing investigation as to who might be responsible, European markets look set to open lower this morning
While US inflation appears to be in decline the same can’t be said for inflation this side of the Atlantic, where it has continued to push higher, although inflation in the UK did get a bit of a respite in August, falling back to 9.9%, from 10.1% in July.
This didn’t last long as prices edged back to 10.1% in September, with food prices continuing to act as a tailwind, rising from 13.1% to 14.6%.
These increases in food prices look set to translate into an even higher October reading of 10.7% later today, with the raising of the energy price cap also expected to act as a tailwind.
The rise in core prices is also starting to become a larger concern, despite the stabilisation being seen in energy prices in the last few months.
Having raised interest rates by 75bps last month the Bank of England will be hoping that we don’t move too much higher than the 6.5%, we saw in September
The government’s new fiscal plans that are due to be outlined tomorrow, could also play a part in slowing inflation with new tax rises and spending cuts due to be announced.
There’s no better way to slow inflation than to kill demand which is what the government’s new plans look set to do. Wages are holding up reasonably well on a historical basis, but they remain well below headline inflation levels, helping to keep a lid on consumer spending.
More encouragingly PPI inflation does appear to be showing signs of slowing, and is set to continue to do so, which could translate into lower inflation as we head into 2023.
While retail sales in the UK have been uniformly dire this year, the consumer in the US has been much more resilient despite similar price pressures, although the spikes seen in natural gas prices in the US have been nothing compared to those being seen in the UK and Europe.
This is due to the US having in its own source of natural gas in the form of shale which has kept prices reasonably low, and not impacted on consumer demand by anywhere near as much.
In September retail sales came in unchanged, while the previous month was revised up to 0.4%.
Today’s October numbers are expected to come in at 1%, which appears to show that despite rising prices, consumers still have the appetite to spend money.
EUR/USD – pushed above the August highs at 1.0370, and up to the 1.0480 area, briefly pushing above the 200-day SMA before slipping back. A close above 1.0430 is needed to push up towards the 1.0600 area. Support all the way back at the 1.0180 area.
GBP/USD – pushed up to the 1.2030 area before slipping back. This is likely to be a huge barrier for any further gains. Support remains all the way back at the 1.1640/50 area.
EUR/GBP – continues to chop between resistance at the 0.8820/30 area, with support still at or around the 0.8690 area.
USD/JPY – slid all the way back to cloud support below 138.00, rebounding from the 137.65 level yesterday, with resistance at the highs this week at 140.80. While below 141.00 the bias remains for a weaker US dollar.