Market News & Insights
17 October 2017

Is Inflation on the BOE’s Crosshairs

There was very little in the way of major data or news flow throughout the day yesterday. In the UK and Ireland focus on (ex) hurricane Ophelia headlines and the eerie red sky that enveloped London in the afternoon meant there was an apocalyptic feeling, however this was certainly not evident in markets as the run higher continues. To be fair the run higher is certainly being led by US bourses. In Europe we saw a steady session close just above flat with Spain lagging given ongoing Catalan concerns. We have entered earnings season once again and the expectations of a strong 3rd quarter results helped US indices top fresh highs once more, as the broken record continues to repeat. The greenback was also an outperformer, recovering back from Friday’s two week lows on expectations US President Donald Trump had a good meeting with Stanford economist John Taylor, who would be considered a hawkish prospect for the upcoming Fed Chair position.

GBP was mixed on the day, a firm start for the pound then saw some GBP selling mid-session before sterling recovered overnight once more with focus now on today’s inflation report and commentary from BOE members who testify before the treasury select committee. The euro also found itself on the back foot, politician concerns following confirmation of Austria’s youngest (and far right) leader, concerns on Spain and of course half an eye on the ECB all resulting in the euro being out of favour. Overnight AUD was initially weaker however has since recovered as the RBA minutes suggested they are not going to just raise right or adjust policy just because other major central banks are in that process.

It’s a big day for GBP today as we await the all-important print of CPI inflation data. The pound has found itself in a firmer position as market expectations have risen. The BOE will be forced to raise rates to try and combat surging inflation putting pressures on real wage growth. Year on year headline inflation is expected to have risen to 3%, a long way above the BOE’s 2% target, while core inflation sits at 2.7%.

While the US and Eurozone are looking to tighten policy from a stronger position, the UK and the BOE have almost found themselves trapped between a rock and a hard place and are almost being forced into raising rates from a weaker economic position. We would expect to see the stronger GBP having a drop in impact into UK inflation figures in coming months so perhaps Carney talking up the prospect of rate hikes will do the job for him. Sadly we’ll eventually face the boy who cried wolf and even as it stands Carney’s reputation has taken some considerable criticism for unreliability. Both he and several other members of the BOE are scheduled to speak today, Carney’s testimony to lawmakers due just after 11.00am GMT.

The pound has been slightly firmer this morning but inflation and Carney’s comments will be key. Should we see inflation at 3% or above and comments from Carney suggesting rates can go higher, then we will almost certainly see a rally in GBP pairs. GBPUSD has resumed its rally having taken a breather yesterday, the weeks opening highs just above 1.3300 offer first line resistance. Should we see a break above there we’ll likely progress higher towards 1.3400/55 area. Any move to the downside will run into light support around 1.3220, 1.3172 with firmer support around the 1.3100/1.3120 area. EURGBP is under pressure as the pound presses the pair lower, our real target back towards .8800 area remains very much in play as the pair consolidates in the wider range between .8750 and .9000.

We have additional action from the Eurozone this morning with the German ZEW survey which gauges economic sentiment. But we also have inflation data from the Eurozone as well with the final estimate of September’s reading expected to confirm inflation at 1.5%. Should we see any signs of weakness in Eurozone inflation then the single currency will almost certainly find itself under selling pressures, especially ahead of this month’s ECB meeting on the 28th. There will also be some ECB speakers across the wires so their stance will be interesting. In recent months ECB commentary has tended to focus more on the good QE has done, and that a sudden removal could create risks for the Eurozone economy. Should we continue to see this rhetoric from ECB members then additional downside pressures could well persist for the Euro into the month end.

Some industrial production and manufacturing production data headlines the US session but is unlikely to shift the stance of the Fed in any great deal. Earnings season and politics however will likely be the focus. Trump has developed the habit of making a lot of noise on a topic then handing it off to congress, where it inevitably gets bogged down. We are still waiting for details on health, tax and infrastructure reforms that have been touted by the US President and while the economy remains firm, and stocks at continued elevated positions. There are some concerns about escalating tensions with Iran, while the North Korean conflict simmers away without much progress. All these issues are certainly a great concern, but for now markets are not taking any direction from them.