Inflation in the UK returned to a six-month high of 2.3% in October, spurring a rally for the pound on market open this morning. Part of this bounce reflected energy regulator Ofwat’s increased price cap, which caused a significant spike to the price of gas and electricity. While food price inflation held steady month-on-month, core inflation ticked up slightly from 3.2% to 3.3%. A hotter than expected inflation report was a boost for the pound as markets reduced their bets on another interest rate cut from the Bank of England next month.
Yesterday’s trading underlined the snowballing risks facing currency markets. Sterling fell in the morning against the euro and the US dollar before recovering its footing in the afternoon. EUR/USD also fluctuated between gains and losses before finishing near where it started the day.
The relatively cautious tone struck by Bank of England governor Andrew Bailey seemed to have a less positive impact than it would normally have on the pound on Tuesday. Appearing before the Treasury Select Committee in the House of Commons, Bailey said that a gradual approach to interest rate cuts would help policymakers accurately track inflation risks. The pound perked up slightly after those remarks but not by enough to push it into positive territory on the day.
A further escalation to the situation in Ukraine rippled through European markets yesterday. News that Kiev had struck inside Russia with US-made rockets added to the jitters and European stock indexes shrank from the prospect of a Russian response. Some fairly muscular comments from Russian military leaders further ratcheted up tensions.
In normal times, an increase in geopolitical tension is almost certain to lead to a boost for the US dollar. These are not normal times (in case your attention has been elsewhere) and the reverse was true yesterday. The euro and the pound stabilised after the news broke, which led to a fair degree of head scratching and highlighted the unpredictable nature of these markets.
Building permits in the US fell by 0.6% month-on-month to a seasonally adjusted 1.416mn in October, several hundred thousand below forecasts. The study, which tracks local approval for new construction projects, is one of the key data points markets will be tracking to gauge the early impact of Donald Trump’s victory on economic activity.
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