CPI jumps but pound yawns

The British pound is drifting on Wednesday. GBP/USD is currently trading at 1.3432, up 0.04% on the day.

UK inflation hits 10-year high

Inflation in the UK surged in October and reached a 10-year high. Headline CPI climbed to 4.2% y/y, up sharply from 3.1% in September. This was above the consensus of 3.9%.

For BoE policymakers, the headache of high inflation is turning into a migraine. CPI is now more than double the BoE’s target of 2.0% and is putting further pressure on the bank to raise rates at the December meeting. The bank held rates at the November meeting, which caused shock waves in the markets, as Governor Andrew Bailey had sent strong hints that the bank would raise rates in order to contain inflation. The non-move has hurt the bank’s credibility and now Bailey & Co. are facing even higher inflation than a month ago. The BoE is projecting inflation to go as high as 5% in early 2022 before falling lower in 2023. With inflation on the move, the December meeting will be a live one, with a strong chance that the BoE finally presses the rate trigger.

Bailey has also said that employment numbers, in particular the termination of the furlough scheme, were important factors in the rate debate, and Tuesday’s strong data is further ammunition in support of a December hike. Unemployment fell sharply in the July-September period, with 304 thousand persons finding work, and the unemployment rate dipped to 4.3%, down from 4.4%.

Sterling continues to have a sleepy week, oblivious to the jump in employment and inflation. Next up is the release of October retail sales on Friday, with the markets bracing for a headline reading of -2.0% y/y, compared to -1.1% a month earlier. If retail sales did worsen, I would expect the pound to lose ground.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3310. Below, there is support at 1.3206
• There is resistance at 1.3562 and 1.3710

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