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  • richard evans

Potential for US inflation down, UK inflation up

Good morning


All was quiet through yesterday, and with some Asian markets still on holiday it was reasonably quiet overnight as well.  Japan shares reopened after their holidays, Nikkei pushing up almost 3%.  China remains closed for their new year holidays.  This morning we have seen the latest UK employment numbers which brought a lower unemployment rate and higher than expected average earnings.  GBP has been given a boost as a result, GBPUSD is up to 1.2655, pretty much where it topped out yesterday, while GBPEUR is just a  pip or two shy of 1.1750. 


US inflation numbers will be the key today and there is a lot that could happen here on their release.  A soft reading, particularly one softer than expected, could see USD drop and US stocks extend from their highs.  Conversely, if inflation disappoints to the upside, USD is likely to push higher and US stocks should fall.  It possibly isn’t quite as binary as that, but that’s how it feels.  It is difficult to know where the bigger impact for markets is.  The Fed have done a good job of making it clear they are in no rush to cut rates even though they are aware inflation is falling, so in terms of rate expectations I’m not sure we’ll learn a lot from todays release. 


Tomorrow morning we will have UK’s inflation numbers.  These are expected to show a bit of a rise from last time around which is helping support GBP but must be well priced in already.  I still feel the bigger risk is higher GBPUSD, I can imagine UK inflation coming in hotter and US inflation looking softer.  GBP would likely make gains against EUR if this were to be the case. 


However we know it is incredibly difficult to forecast direction.  Take New Zealand, it was only last week the talk was of higher inflation and higher rates, yet overnight their inflation expectations came in lower than expected and sent NZD lower as a result.  GBPNZD is now back above 2.0700 which is where it was before the ANZ research article that triggered the NZD buying.   


Another factor that could hold back GDP is the idea of a recession.  BoEs Bailey spoke yesterday and said that any recession is likely to be shallow and that there are signs of some sort of upturn, although it does a clue that BoE are eyeing the possibility of a recession.  UK GDP numbers are out Thursday morning to add to an already busy week of data. 


Romania are expected to keep their rates unchanged at 7% at todays meeting, we will see their latest inflation report as well which may give clues as to future rate paths.  I’d expect rate cuts later in the year, perhaps to coincide broadly with ECB cuts.


One of my least favourite ‘currencies’ if I should even call it that, is Bitcoin.  Still, while I may not be the only one who doesn’t like the imaginary asset, others are happy buying it and have pushed the price above $50,000 for the first time since December 2021.


Elsewhere, eyes are of course on Israel/Gaza where, after no ceasefire agreement was to be found, Israel have resumed their attacks in Gaza, now targeting Rafah in their attempts to remove any remaining Hamas factions, despite some criticism from other countries.  I can’t see either side backing down, Israel seem to have made it clear they won’t stop until the hostages have been released, while Hamas won’t release hostages unless Israel withdraw from Gaza.  A compromise doesn’t look likely although there are some suggestions that Mossad and the CIA will be discussing a hostage deal later today.


In sport, Chelsea grabbed a very late win over Crystal Palace yesterday evening, Pochettino keeps his job for another week or two.  The midweek football is really focussed on Champions League which Spurs cleverly managed to avoid, choosing instead to concentrate on the league! 


Otherwise, little to write about, sit back and wait for the US data this afternoon and the volatility that may, or may not, come with it. 


-  10.00 German ZEW

-  13.00 Romania rate announcement

-  13.30 US CPI

-  07.00 UK CPI, RPI, PPI



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