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  • richard evans

UK inflation tomorrow morning could be key for BoE

Good morning

As expected things were pretty quiet yesterday. Any rally in GBPUSD over 1.2400 was brief, and we have stayed below that level through the Asian session, 1.2370 being about the low and as I type we are just five pips or so away from there. Similarly, EURUSD has failed to regain 1.0700 but is currently at 1.0675 leaving GBPEUR lower at 1.1590. EU inflation numbers this morning, these are the final readings and are not expected to be changed from previous levels so unlikely to affect EUR to any great extent, with ECB expected to keep rates at 4% for some time to come.

The generally strong US dollar has been supported by comments from both Yellen and ex-Fed official George. Yellen said she still thinks previous Fed actions are not fully impacting markets as yet but she doesn’t see any risk of a downturn in the near term. George said Fed have not yet reached their inflation target, hence the door is open for further rate rises. She is happy to be patient in the battle against inflation and doesn’t mind seeing a pause in rates to assess impact of previous Fed rate rises.

RBA minutes overnight didn’t really impact the markets to any great extent, GBPAUD stuck around the 1.9220-1.9240 area. The main difference between this meeting and the previous meeting was the increased mention of risks of a China slowdown. On the subject of China, PBoC offers their latest rate announcement overnight, kicking off the many central bank meetings we have this week. While China are looking at various forms of stimulus, PBoC are not expected to cut rates given their support for the CNY. USDCNY fix was set at 7.1733, over 1100 points lower than sensible levels.

CAD CPI is out today and there is a suggestion this could come out at the upper end of expectations, leading to a possible rate rise by BoC in October. USDCAD has already moved from 1.3695 in early Sept to 1.3465 now, risks of two-way price action is clear but a weaker inflation report today could see USDCAD push higher. I’d be tempted to pay 15 cad pips for an overnight 1.3475 USDCAD call just in case.

Early tomorrow morning we will see the latest UK inflation readings. The headline is expected to be higher than last time, perhaps up to 7.1% from 6.8% last month, helped in no small part by higher energy prices. There is a hope the core inflation reading may come in 0.1% lower than previous to 6.8%. Do not underestimate the importance of this release. Despite the recent GBP weakness, BoE are still expected to raise rates Thursday, this could change if we were to see inflation come in significantly lower, but more likely would give BoE a chance to be more confident in suggesting this rate rise could be the last in this cycle.

A lot of talk over recent months has been over inflation, and rightly so. Wage inflation has been a key issue and it is therefore with some interest I see the US UAW union (united auto workers) have demanded 40% pay rises over the next four years, together with a shorter working week. Bloomberg reports the minimum salary expected by American workers in a new job is just shy of $80,000, while I read a while back that a UPS driver’s annual package amounts to some $170,000. At some point these wage increases cannot be passed to customers, obviously the fear then comes of lower corporate profits and potential job losses.

General unhappiness in the geopolitical world seems to be in the news quite a lot. China are unhappy that the German Foreign Minister recently called President Xi a dictator, while Canada has said the Indian government could be behind the death of Canadian Sikh leader Nijjar. The ‘West’ vs ‘BRICS’ is very much alive, although Yellen did warn that while we should look to de-risk from China, it would be a mistake to fully de-couple.

Man City and Newcastle Utd will be playing Champions League football this evening. Spurs are not in the tournament this year having cleverly decided to avoid qualification to all European competitions last season! Concentrating on the league no doubt!

- 10.00 EU HICP

- 13.30 US building permits, housing starts

- 13.30 CAD CPI

- 17.00 BoCs Kozicki speaks

- 00.50 Japan trade balance

- 02.15 PBoC rate announcement

- 07.00 UK CPI, RPI, PPI

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