RedFX Snap: UK Inflation jumps, GBP/USD higher
We focus on UK data published this morning, but don’t ignore this afternoon’s US Retail Sales data – if this is weak, it may propel the USD’s pullback which seems well-established now.
The rate of UK inflation jumped to 11.1% in October (vs 10.7% expected), which follows 10.1% print in September – this takes us to the highest reading since 1981 and exceeds the average across Europe.
Importantly / worryingly, the ‘Core’ gauge of UK inflation also rose to 6.5% annualized – this excludes the volatile food & energy items, meaning that inflation is not simply being caused by factors external to the UK economy.
With tax increases and a new era of austerity likely to be announced in the ‘emergency budget statement’ released later today, economists will hang on every word and hope that these factors do not converge to exacerbate problems for an economy which is being hurt from multiple angles.
UK Retail Price Index also rose at a rate which now far outpaces expectations and spells danger for the affordability of basic items for the UK public. The October Retail Price Index reading was 2.5%, which takes the annual rate to 14.2%. This will have a very real impact on affordability in the UK and will have an amplified effect upon those earning fixed incomes (pensions, etc.) or lower income families. In turn, this will have a ripple effect throughout the UK economy – the Bank of England’s forecasts of a 2yr recession seem justified.
FX: With rampant inflation continuing, the Bank of England is expected to keep hiking rates, and GBP/USD is benefiting from a slightly weaker USD as well. GBP/USD at 1.1850 is a world away from the 1.1000 area that we saw only 2 weeks ago.
GBP/EUR at 1.1450 is struggling to battle higher, currently sitting in the middle of recent ranges.