This morning’s inflation data from the UK failed to push GBP another leg higher despite the decent upside surprise, given yesterday’s price action already saw GBPEUR moving back to fresh highs last seen in May 2021, while the rally extended through this morning ahead of the CPI release. The elevated expectations around the release meant the bar was set high for GBP to rise further and break above May’s highs, however the inflation data still marks as another confirmation that the Bank of England could embark on an interest rate hike in February. The YoY headline figure printed at 5.4% vs the 5.2% estimated, while the MoM dropped to 0.5% from last month’s 0.7% – albeit above the 0.3% expected. The increases were broad-based across many different categories, ranging from restaurants and hotels to clothing and footwear, suggesting that inflation is more persistent too. Previously, most of the upside stemmed from food and energy prices, which are set to moderate over the coming year, but the broader-based strength places pressure on the Bank of England’s interest rate hiking cycle and further increases the chance of an interest rate hike in February. Looking to the rest of the day, the data calendar is fairly light, which means focus is back on political developments in the UK along with central bank speakers. At 14:15 BoE officials testify to the Treasury Committee in Parliament about the financial stability report.
EURUSD has come down from highs seen at the start of the week as a further increase in US 2Y and 10Y yields favoured the dollar over the last session, although this morning marked a halt to the USD rally. Eurozone bond markets have also not been idle, as the German 10-year yield moved to positive territory for the first time since May 2019. The move reflects a drop in the price of German debt, as investors bet the European Central Bank will need to withdraw stimulus measures to slow inflation. At the ECB’s December meeting, the central bank announced it would continue its asset purchase programme after the Pandemic Emergency Purchase Programme (PEPP) runs out in March, although at a slower rate than investors had expected. That, in combination with higher yields in the US following increased interest rate expectations, has pushed German bond yields higher. With the Bank of England and the Federal Reserve already having shifted their focus to slowing down inflation, this begs the question of when the ECB will start giving in. German inflation data at 10:00 GMT today will be watched by markets for further cues.
A continued rise in US Treasury yields has put a floor under the dollar in recent sessions, as markets continue to speculate on interest rate hikes by the Federal Reserve. This has been the case for both the 2Y and 10Y yields, which have surged since US markets returned from a local holiday on Monday. This morning, the rally came to a halt along with the selloff in US Treasuries. As Federal Reserve members are not set to speak out to the media until next week’s FOMC meeting given the current blackout period, investors will continue to keep a close eye on US bond markets. Today’s data calendar includes Building Permits and Housing Starts data from the US which will be looked upon for fresh trading impetus at 13:30 GMT today.
The Canadian dollar saw a stark rebound against the US dollar in yesterday’s latter part of the trading session as a crude pipeline running from Iraq to Turkey was hit by an explosion, supporting crude oil prices. News that the pipeline is set to reopen this morning meant oil prices pared back gains again, along with the Canadian dollar. The shutdown of the pipeline, which transported 450,000 barrels a day last year, risked further tightening in crude oil markets at a time when supply disruptions and strong demand had already sent prices skyrocketing. For today, loonie traders turn to Canadian CPI data which is released at 13:30 GMT and should further support the Bank of Canada’s tightening cycle. The MoM figure is set to print at -0.1% down from last month’s 0.2%, while the YoY figure is expected to rise further to 4.8% vs 4.7% previously.