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Upside risk for UK inflation, ahead of FOMC minutes

Inflation risk on the rise

It’s not been a great week thus far from European markets, although losses have been modest thus far, given the gains we’ve already seen this month.

US markets, having got off to a positive start on Monday with another record for the S&P500, had a more disappointing day yesterday, finishing sharply lower, after US retail sales missed sharply to the downside.

This uncertainty about a slowing global recovery may well have prompted a little bit of weakness in the past two days, however Asia markets appear to be shrugging that off after the RBNZ kept rates unchanged instead of raising them in response to the new lockdown imposed in New Zealand. Consequently Asia markets have found a bit of a bid and as a result markets here in Europe look set to open higher, despite concerns that increasing outbreaks of the delta variant will stall the economic recovery completely.     

After yesterday’s better than expected unemployment and wages numbers, today’s UK CPI numbers could heap further pressure on UK policymakers to look at tightening monetary policy in the coming months, as financial markets start to price in the prospect of rate hikes sometime within the next 12 months. 

The Bank of England already expects that UK CPI could well head towards 4% by the end of the year, even if most MPC members appear to think it will be temporary in nature, and while today’s numbers aren’t expected to see an increase, that doesn’t mean it won’t happen given what’s happening with factory gate prices, which are still increasing, and are up close to 10%. 

There are signs of some dissent to this wider transitory view with external member Michael Saunders dissenting on the bond buying component of the recent policy decision, with some signs that Deputy Governor Dave Ramsden might not be too far behind him.

UK CPI is already well north of the central banks 2% target at 2.5%, which means we look set to see further increases in the coming months.

Today’s UK CPI numbers for July are expected to see a slight fall to 2.3%, however they could just as easily move higher, probably driven by the delayed economic reopening that was deferred from June.

A lot of retailers are already nudging prices higher, as they look to claw back lost revenue from the various lockdowns, while wages growth is already much higher than the headline CPI number if yesterday’s earnings data is any guide, even when stripping out base effects.

In Europe headline CPI for July is expected to rise to 2.2%, slightly up from 1.9%, although core prices are much more subdued at 0.7%.

Finishing off the day we have the latest FOMC minutes, in the wake of Jay Powell’s comments yesterday.

It would be surprising if today’s minutes altered the market perception of when a taper is likely to happen given the more recent commentary of various Fed policymakers, in light of the recent improvements in the US jobs data, which wasn’t available to members back in July.

The July meeting saw the US central bank keep monetary policy unchanged maintaining the level of bond buying at $120bn a month.

The Fed did acknowledge that the economy had made progress towards its goals, but there was still some way to go. The decision was unanimous.

On the question of what signified “substantial further progress” Fed chair Jay Powell was typically reticent, declining to offer much more than various banalities on the topic.

Various Fed officials since that meeting then have offered conflicting views on what progress might mean in terms of the labour market, and while the last two payrolls’ reports do offer optimism on the employment front that a tapering of bond purchases may come this year, the most recent jobs data wasn’t available to FOMC members at the meeting at the end of July, which means today’s minutes are likely to be stale. 

Powell did admit that discussions had begun on the mechanics of scaling back bond purchases when the time came, so these discussions might be illuminating, although there were disagreements on the split between MBS and Treasuries, with some arguing that mortgage-backed securities purchases should be scaled back faster, to take some of the heat out of the housing market.

It is clear from recent comments from the likes of permanent board members Christopher Waller, as well as vice chair Richard Clarida that the Fed is now much nearer to tapering now than it has been for some time and that it could come as soon as October, jobs data permitting. .   

EURUSD – having failed to move much beyond the 1.1800 area last week, we’ve slipped back towards the 1.1700 area. A move below 1.1700 retargets the 1.1600 area and last November’s lows. We need to push back through the 1.1830 area to retarget the 1.1900 area.    

GBPUSD – looks to be closing in the 1.3725 level, which is 61.8% retrace of the 1.3570/1.3985 up move, having slipped below the 1.3780 area. We still have resistance at the 50-day MA and 1.3870/80 area. A move below 1.3700 targets 1.3650.     

EURGBP – has continued to squeeze higher and could move up to the 0.8580 area. Support remains back at the recent lows at 0.8450, but also at 0.8500. 

USDJPY – having failed at the 110.80 level we’ve found some support at the 109.10 area, while we also have last week’s low at 108.75. A move below 108.70 targets the 108.20 area.


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