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UK CPI set to slow, Fed set to raise rates by 50bps

Federal Reserve

After going into hibernation after the US November payrolls and services ISM reports, the peak inflation narrative got a fresh lift yesterday when US CPI rose by its lowest annual number this year, sending bond yields sharply lower and European markets to their highest levels in six months.

US markets surged higher on the open with the S&P 500 pushing up to three-month highs, however there was some reluctance to follow through the initial gains ahead of today’s Fed rate decision, with US stocks eventually finishing the session well off their peaks, which in turn looks set to see markets in Europe open slightly lower. This caution is probably well-merited given today’s Fed decision where we are still expecting to see a 50bps rate rise, but where there is a risk that the exuberance of yesterday might not survive first contact with Fed chair Jay Powell’s press conference.

While Powell reinforced the narrative behind a step-down in the pace of Fed rate rises in his Brookings speech earlier this month, he may well not be so keen to feed into the markets pricing in a more dovish outlook for rates as we head into 2023, especially when CPI is still very high, and when there is still a material risk that inflation could remain high deep into 2023. That’s not to say that the Fed doesn’t have concerns over the effects of policy lags, but yesterday’s inflation number does appear to suggest that after a 50bps move later today, the pricing of what comes next does appear to be shifting towards further step downs in the coming months, with the potential for 25bps increments starting in 2023.

Of course, much of that will depend on what follows data wise over the next few weeks with the December non-farm payrolls report due in January, followed by subsequent inflation numbers which will fall due between now and 1 February, when the FOMC first meets next year. Before tonight’s last Fed meeting of 2022, we’ll get an insight into whether the peak inflation that we are seeing in the US is starting to manifest itself in the UK inflation numbers.

Later this morning we’ll get to see whether UK CPI inflation has slowed in November, after we hit 40-year highs of 11.1% back in October, with household bills rising by 11.7%, and grocery food price inflation rose to 16.5%, with big increases in the price of staples like milk, eggs, and cheese. Recent PPI numbers have suggested that inflation is starting to plateau here in the UK, however due to errors in the calculation of these numbers, the ONS has delayed the release of these so we won’t be able to glean anything in the way of clues as to what is happening in this particular area.

On the headline CPI numbers we are expecting to see price pressures slowdown from 11.1% to 10.9%, although when inflation is well above 10%, perhaps slowdown isn’ t the correct term. It also isn’t likely to affect the calculus for the Bank of England tomorrow when they are also expected to raise rates by 50bps, although any decision is unlikely to be unanimous. Core prices are expected to remain steady at 6.5%, while the RPI index is expected to fall back to 13.9% from 14.2%.      

EUR/USD – moved through the 1.0600 area pushing up to 1.0673, opening up the potential for a move towards 1.0800. Needs to hold above the 1.0520 area for this to unfold, with further support at the 1.0340 area.

GBP/USD – managed to push through the 1.2300 level, potentially opening up the prospect of a move towards 1.2750. Still have support at the 200-day SMA at 1.2110, with interim support between 1.2260 and 1.2280. 

EUR/GBP – slipped back to support just above the 200-day SMA but continues to hold above it. A break below 0.8540 opens up further losses towards 0.8480. Resistance at 0.8650.

USD/JPY – slipped back from the 138.00 area briefly slipping below the 200-day SMA at 135.00 at 134.66, keeping the bias towards the downside. We need to see a concerted break below the 200-day SMA to retarget the lows at 133.60, and lower.

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