The pound recovered from the doldrums it’s been in for the past five days this morning as a sharp uptick in inflation kiboshed lingering hopes of an interest rate cut in December.
Inflation in the UK returned to a six-month high of 2.3% in October. The increased energy price cap caused a significant rise in 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%.
Yesterday’s trading underlined the snowballing risks facing currency markets. 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.
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.
Housing and house building is one of the key data points markets use to gauge economic activity. 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. On Friday we’ll get a reading on construction in the UK too.
Indeed, Friday is shaping up to be quite a day for data, with the GfK consumer confidence reading, retail sales and PMI, all of which will be an effective guide to both consumer and business mood as we enter the last month of the year. We’ve already seen this morning how this can all affect exchange rates, so if you are committed to a currency trade, call your account manager on 020 7898 0541 to discuss fixing your rate.
