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UK CPI set to rise to another record high

Inflation infographic

European markets underwent their second successive day of gains yesterday, shrugging off a negative start to close the session strongly after reports emerged from Moscow which indicated that gas flows out of the Nord Stream 1 pipeline would resume as scheduled on Thursday, albeit at a lower capacity.

This is certainly welcome news if true, given that earlier in the day European Commission officials were making the assumption the pipeline would not restart.

They would probably be wise to continue on this basis given the predilection for Moscow to weaponize gas flows as they already have been doing.

US markets also finished the day strongly higher, this time hanging onto their gains after European markets had closed, carrying on the momentum of the day in a move that looks set to translate into a higher European open.

Today’s focus turns back to the UK again, following on from yesterday’s robust employment data, and the latest June CPI inflation numbers, which are expected to rise to another record high.

Yesterday Bank of England governor Andrew Bailey raised the prospect that a 50bps rate hike was on the table at the August meeting, although he was careful not to say it was locked in. The August meeting will also be used for the publication of the central bank's plans to reduce the size of its balance sheet.

While this is welcome, it's also long overdue given the central bank's previous announcements that inflation could peak at 11% later this year. The central bank clearly needs to do something, they have been tentative and weak all year, watching the currency decline while being wishy washy about whether they have the means to combat some of the threats being posed by the current surge in prices.

It is true that no one could have foreseen the Russian invasion of Ukraine and the effects that it has had on the global economy, the central banks procrastination pre-dated that when it was clear inflation was starting to become embedded. Now that we’re seeing it move into grocery prices after the latest Kantar data showed grocery prices rise by 9.9% it is becoming ever clearer that inflation is becoming much more persistent.

This is expected to manifest itself further in today’s June CPI numbers which are expected to rise from 9.1% to a new record of 9.3%, although core prices could slip back to 5.8%.

Almost half of the increase in headline CPI is reflected in higher gas, electricity, and petrol prices, which accounted for over 4% of the increase in May. This is expected to continue in June, and while expectations are for a rise to 9.3%, there is a risk we could go even higher if last week’s big spikes in the US are any guide.

The picture isn’t any better on the old RPI measure which rose to 11.7%, while PPI input prices surged to a new record of 22.1% in May, and are expected to rise further to 23%.

EUR/USD – continues to push off the lows, and above the 1.0200 area, opening up the potential for a return to the 1.0340/50 area ahead of the ECB tomorrow. Bias remains lower while below these previous lows.  

GBP/USD – continues to squeeze higher, however the rebound seems half-hearted. We need to push through the 1.2040/50 area to stabilise and target the 50-day SMA. Support now comes in at the 1.1870 area, with the bias remaining towards the downside while below the 50-day SMA.

EUR/GBP – pushed back from the 50-day SMA at 0.8540, which is currently keeping a lid on the euro. Only a move above the 50-day MA argues for a move towards 0.8600. While below the bias remains for a drift back towards the recent lows.  

USD/JPY – three days of declines so far after finding resistance at 139.40 last week. A break of 140.00 targets the 145.00 area. Support comes in at the 135.80 level, as well as the more solid support at the 134.80 area. 

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