UK Inflation Highest in 5 Years – Cable Pops 1.,3200

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Market Drivers September 12, 2017
UK Inflation highest in 5 years
NZD soars to 7300 as Labor loses strength
Nikkei 1.18% Dax 0.54%
Oil $47/bbl
Gold $1326/oz.

Europe and Asia:
GBP UK CPI 2.7% vs. 2.5%

North America:
No Data

Cable cleared the 1.3200 level and soared all the way to 1,3270 before pausing today on the back of hotter than expected inflation data that stoked speculation of a rate hike from BOE.

UK Inflation hit its highest level in 5 years with core CPI rising to 2.7% versus 2.5% eyed as rising prices for clothing and motor fuels were the greatest contributors to the increase. UK inflation has remained consistently above the 2% level – running much hotter than the rest of G-7 universe for quite some time – but BOE has been loathe to tighten monetary policy due to the uncertainty surrounding Brexit.

This Thursday’s BOE meeting will be of great concern to the market as traders will want to see if Governor Carney addresses the issue or dismisses it as temporary phenomenon, keeping monetary policy in present accommodative state. Although Brexit hangs over the Uk economy like the sword of Damocles, Mr. Carney may have to choice but to deal with the rising price pressures even at the risk of dampening consumer demand.

UK economy has been remarkably resilient since the Brexit vote (though many critics would point out that this has been a function or remaining in the EU while enjoying a markedly lower exchange rate). The latest PMI data shows that expansion remains in place while inflationary pressures have shown no signs of slowing down. Therefore, Mr. Carney may have no choice but to assume a more hawkish posture on Thursday. If he does sterling could challenge the pre-Brexit resistance of 1.3500 which has been the Maginot Line for the pair ever since the vote was taken. For now the pair remains well bid and could make a run at the 1. 3300 level as the day proceeds.

The dollar meanwhile continues its recovery with USDJPY clearing the 109.50 level in Asian session trade. With no eoo data on the docket again today, the trade will be driven by equity and fixed income markets and if the 10 year yield moves back to 2.20% USDJPY will make a run at the key 110.00 figure before the end of North American trade.

Boris Schlossberg
Managing Director

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