Sterling reacted positively to inflation data released this morning. The pound rose 0.5% against the euro and 0.3% against the dollar after the Office or National Statistics (ONS) reported that the Consumer Price Index (CPI) for November showed UK inflation surging to an annual rate of 5.1% last month, its highest since September 2011, up from 4.2 % in October. The reading exceeded the consensus forecasts of a 4.7 % rise and will unsettle the Bank of England who begin their 2-day policy meeting today. The International Monetary Fund predicted yesterday that British inflation would reach around 5.5 % in the second quarter of next year and warned the central bank not to succumb to “inaction bias“. However, most analysts do believe the BOE will not raise rates, because of the unknown scale of threat posed by rapidly rising cases.
The euro is up slightly against the dollar in early trading. EUR/USD direction will be driven by central bank divergence themes over the next 2 days with the Federal Reserve Bank policy announcement tonight and the European Central Bank tomorrow. Markets expect the Fed to taper its bond buying scheme by up to $30bln per month, but even if these expectations are not met, they are still well ahead of the ECB in tightening monetary policy, so any short term gains by the single currency are expected to be limited.
The dollar is down slightly in early trading as traders reposition ahead of tonight’s Federal Reserve Bank policy meeting this evening. Financial markets have been pricing for the Central Reserve Bank to end its pandemic bond buying scheme around March next year and then proceed with 2 possible rate hikes in 2022. However, the meeting comes as the rapid spread on the Omicron variant of Covid 19 is causing concern that the economy’s recovery will be derailed, so greenback demand may be limited prior to the announcement. Retail sales for November will be released this afternoon.
01.30 pm US Retail Sales
07.00 pm US Federal Reserve Bank Policy meeting