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Bank of England rate hike expectations rise ahead of UK CPI

A wad of twenty pound notes

After the pullbacks seen on Monday, we managed a rather tepid rebound for European stocks yesterday, as caution about the economic outlook continued to temper sentiment.

There was no such caution amongst US investors with markets there closing higher for the fifth day in a row, and the S&P500 back above the 4,500 level, as company earnings continued to beat expectations.

This morning’s focus, ahead of today’s European open, which is expected to be a mixed one is today’s UK CPI numbers, which could well be a signpost for a Bank of England rate rise as soon as next month.

Today’s numbers would almost appear to be academic if the recent shift in narrative by Bank of England governor Andrew Bailey is any indication. If markets are right, we look set to see a rate rise, either at next month’s November meeting, or at the December meeting just before Christmas.

While this seems plausible, what is less so is the market expectation that we could see a rise in bank rate to 1.2% by the end of next year. This strikes me as the market getting way ahead of itself, and not in any way plausible.  

The shift in sentiment is no better exemplified than in the move in UK 2-year gilt yields which have risen 33 basis points in October alone to currently sit at their highest levels since May 2019.

In August we saw UK CPI jump to 3.2%, from 2% in July, largely driven by price rises in restaurants and other hospitality venues, when compared to the suppressed levels a year previously due to the “eat out to help out” scheme. 

Since those August numbers we’ve seen prices increase further and with various emergency government support measures also coming to an end we can probably expect to see further upward pressure in prices, although most consensus expectations for today’s numbers are for headline CPI to remain steady at 3.2% and core prices to slip back to 3%.

This seems somewhat optimistic given how PPI input prices have risen since the beginning of the year, when they were at 1.3%. Today’s September numbers are expected to come in at 11.8% and a 10 year high. At some point these price pressures will make themselves felt in the headline CPI numbers, and it is worth noting that the last time PPI input prices were this high, headline CPI was at 5.2%. 

This is probably what is worrying the Bank of England, as well as the prospect that rising inflation expectations on the part of consumers might hit demand, if left to run unchecked. The Bank has already said it expects headline CPI to push well above 4% by year end, and the recent surge in energy prices is probably prompting a hasty reappraisal of the UK economy’s prospects in next month’s quarterly inflation report, which comes just over a week after the Autumn Budget, which is due next week. 

If today’s CPI numbers do push up closer to the 4% level today, it will make it increasingly difficult for Bank of England officials to push back on a rate rise narrative, having given it so much air in the past week or so.

It’s certainly prudent to start managing expectations when it comes to raising rates, and a 0.15% increase in bank rate by the end of this year wouldn’t be the end of the world, however the bank also needs to look at curtailing its asset purchase program as well, lest it gives the impression of mixing its messaging.

Later this morning the September CPI numbers for the EU are expected to be confirmed at 3.4%, however core prices are much lower, and still below the ECB’s inflation target of 2%, at 1.9%.

EUR/USD – topped out at the 1.1670 area, but still looks well supported while above the 1.1580 area. A break above 1.1680 targets resistance at 1.1760. Below 1.1520 targets the 1.1450 area.

GBP/USD – moved above the 1.3800 area but was unable to break above the 200-day MA at 1.3840 and drifting back. The bias remains for a move towards the 1.3900 area on a move through 1.3850, with support down back at the 1.3670 level.

EUR/GBP – still finding support at the 0.8420 area a break of which potentially opens further weakness towards 0.8280, and the 2020 lows. We have resistance at the 0.8470 level, and the highs this week, as well as the 0.8520 area.   

USD/JPY – found support at 113.20 last week and having broken above the 114.00 area opens a move towards the 2018 peaks at 114.75 the next target. We have support at 113.80, a break of which could see a move towards the 112.40 level. 

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