The pound was the best performer on the day yesterday after stronger than expected inflation put focus back on the potential for the BOE to raise rates. EURGBP broke below several key supports and closed the day just above .9000. Ideally we would have liked to see the daily close below the .9000 mark to confirm further downside however a bounce back towards .9080 is not ruled out ahead of the next leg lower.
The USD index traded flat on the day yesterday with the greenback losing ground to GBP and EUR throughout the day, yet holding gains against JPY and CAD as risk appetite remained firm. The firmer risk appetite saw stocks in Europe press to 5 weeks highs with only the UK’s FTSE lagging, not helped by the stronger GBP. The positive tone continued into the US session with the S&P trading to record highs once more just short of 2500, while other indices were higher also.
GBP rallied after firmer data released showed UK inflation running at 2.9% vs 2.8% expected and up from 2.6%. It was enough to re-ignite talk of the potential for the BOE to raise rates however as we highlighted yesterday, while the BOE may talk about being flexible (either way) they are unlikely to make any decision while Brexit negotiations continue, unless there is a real squeeze felt on living standards in the UK. One such area that is of concern is the labour market and while the headline figures put the jobless rate at 4.3%, wage growth continues to lag at 2.1% vs 2.3% expected. In short, more people are working for less money, while inflation puts pressure on household costs, salaries are rising slower. This feeds through into consumer confidence and spending and the knock on impact will weigh on the economy. The BOE headlines tomorrows calendar and with high inflation readings and weaker wage growth, it will be very interesting to see how the MPC address to vote.
PPI data headlines the US calendar and while it carries some weight in terms of inflation outlook, it’s unlikely to set the broader tone for the USD today. Focus will be back on the fallout and recovery from Hurricane Irma, while attention is also turning to Washington as headlines around Trump’s tax plan begin to emerge. We’ve heard plenty for the US President over the last 6 months about his tax plan but very little real detail to get our teeth into. The USD and US markets were firmer earlier in the year when there were great hopes a new tax plan and infrastructure program would support the US economy, should this pick up again we may well see additional strength for the USD.
GBPUSD looking at topside resistance with highs traded today at 1.3330, the highest levels since September 13th last year, however we have seen GBP selling since the labour market report and we are looking lower with support back towards 1.3228. EURGBP now finds light support at .8982, and below that we target .8922, while rallies towards .9085 will offer first resistance. EURUSD likely light support at 1.1940, but rallies above 1.2000 will run into sellers