It was another good day for markets in Europe yesterday, with the DAX and CAC 40 setting new record highs for the third day in a row. The FTSE 100 did its best impression of being a killjoy, underperforming and slipping into negative territory.
US markets also enjoyed a decent day, buoyed by solid economic data and positive earnings numbers.
As we look towards today’s European open, we look set for a weaker start on the back of a softer Asia markets session, as a stronger US dollar, and higher yields weighed on wider risk sentiment, as we look towards today’s latest inflation numbers from the UK.
If Bank of England governor Andrew Bailey was serious when he said he was looking at UK labour market data for clues as to whether to raise rates, then yesterday’s unemployment data such as it is has given him less wriggle room if he decides not to act with a modest rate increase next month. This of course assumes you can believe anything he and the MPC say on the matter.
If market pricing is any indicator, then a rate rise is getting slowly priced back in with UK 2-year gilt yields edging higher yesterday to 0.61%, and up 20 bps from the lows set in the aftermath of the decision to hold rates earlier this month.
Today’s UK CPI numbers for October are likely to be the next piece of the puzzle especially if the Bank of England doesn’t dial back market expectations on a December rate increase in the coming weeks.
We’ve already seen UK CPI jump from 2% in July to 3.2% in August and while we slipped back to 3.1% in September this doesn’t look like it will be sustained, with further price rises coming down the pipe if recent PPI data is any sort of guide. Input prices on PPI for September rose to 11.4%.
The Bank of England has said it expects to see a move to 5% CPI by the beginning of next year, if not before, especially with the sharp increases we are already seeing in food and energy prices which means we can probably expect to see further upward pressure in prices in the months ahead.
While core CPI also softened on September falling back to 2.9% from 3.1%, this is likely to be only a temporary respite, with prices expected to push back above 3% with headline October CPI expected to rise to 3.9%, and core prices to 3.7%, although it’s not inconceivable we could see a move on the headline number to 4%.
A big rise in today’s October numbers will merely serve to shift the focus back on the Bank of England, and the potential for a possible rate move in December, though whether markets start to price such an outcome remains open to question after the shambles we saw at the beginning of the month.
Forward guidance is a huge part of how central banks guide market expectations over monetary policy and can be a useful tool in shaping policy. This month’s missteps by the central bank have made that task a lot harder than it needed to be.
Following on from the UK CPI numbers we also have the final EU CPI numbers for October which is expected to confirm a rise from 3.4% in September to 4.1%, with core prices remaining steady at 2.1%.
EURUSD – continues to track lower and on course for a test of the 1.1170 area, and June 2020 lows. To stabilise we need to recover back above 1.1400 to target a move back to the 1.1530 area.
GBPUSD – struggling to rally beyond the 1.3480 area, which is the barrier to a move towards the 1.3600 area. The key support remains back at last week’s low at 1.3350, with a break targeting a move towards 1.3160.
EURGBP – continues to fall with the support at the 0.8420 area the next target. A move below 0.8400 is needed to target the 0.8280 area. The 200-day MA and the 0.8580 area remains the key resistance area.
USDJPY – back on course to retest previous highs at 114.75, with a break potentially opening the 116.00 area. While below the 114.80 area the risk is for a move back towards 114.20 as well as 113.70.