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GBP dips as UK inflation tops expectations, eyes on Truss at PMQs

Good morning

GBP has traded lower this morning after UK data showed there is very little sign of inflation abating. The y/y headline came in at a higher than expected 10.1%, m/m at 0.5% and core CPI higher at 6.5%. GBPUSD, which had traded to mid-1.13s overnight, was at 1.1325 pre the release, went as low as 1.1260, now 20 pips or so off those lows. That 1.1255/60 area is looking important, having been tested and held a few times this week already.

So UK inflation is rising and more rate rises are on the table. Interesting that rate rises help other currencies, but not so much the pound, showing the difficult situation our economy is in right now. While the move is counter-intuitive, it highlights the fact that higher rates are not a sign of a strong economic outlook, instead higher inflation is part of a broader problem. As such I continue to think GBP gains will be limited. US dollar remains high as their officials talk of more rate rises to come, ECB are also talking of more rate rises. All three central banks are looking at reducing their bond holdings, BoE may start selling some shorter dated bonds while ECB may not replace bond holdings that mature.

Japan FinMin Suzuki has said he is checking FX levels more regularly and more closely than ever as USDJPY trades within a pip or two of 149.50. 150.00 a clear target. BoJs Kuroda has said he doesn’t like sudden yen weakness but a stable weak yen would help the economy.

Unlike most markets, China stocks were weaker overnight, not helped by reports that Beijing Covid infections have hit a four month high. Even though case numbers remain low, we know China act quickly to curb transmissions, making more lockdowns possible. That this comes in the middle of the Party congress makies life for Xi slightly difficult, there are even reports of posters being put up aimed at Xi, protesting against the zero-Covid policy. PBoC policy meeting tonight.

Truss will face a tough test at PMQs today. I’m not always glued to this event, I’m never sure if PMQs shows the UK political system in a good light and I very much doubt this one will, but for sheer entertainment it must surely be worth tuning in today. The 1922 committee are also meeting today and there is some thinking they will announce rule changes that could see Truss face a confidence vote soon, current rules say she cannot face one until Sept 2023. There is a chance Tory MPs then draw up a short list of two new potential leaders, and have another vote. Watch this space.

Roll on midday………

- 10.00 EU HICP

- 12.00 UK PMQ

- 13.30 US building permits

- 13.30 CAD CPI

- 16.00 BoEs Mann speaks

- 18.00 Feds Kashkari speaks

- 19.00 Fed Beige Book, monthly budget statement

- 23.30 Feds Bullard speaks

- 00.50 Japan trade

- 01.30 AUS unemployment, NAB business confidence

- 02.30 China PBoC rate announcement

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