US and European Markets:
US markets witnessed another positive session, with the Nasdaq 100 and Dow reaching new record highs, and the S&P500 closing in on the 4,800 level. European markets posted modest gains, remaining below last week’s record highs by the DAX and CAC40. As the Christmas break approaches, attention turns to the UK’s latest inflation data.
Bond Market Reaction:
The past days have been eventful for bond markets following Fed Chair Jay Powell’s unexpected comments on potential rate cuts in 2024. Yields dropped sharply in response, leading to revised timelines for rate cuts. Speculation increased that the Bank of England (BoE) might cut rates sooner, with markets pricing the possibility of up to 115bps of cuts by the end of 2024. However, the UK’s economic performance, inflation, and supportive data from policymakers may challenge these expectations.
Bank of England’s Stance:
The BoE’s recent rate hike and concerns about elevated inflation and the labor market underscore the uncertainty over rate-cut timing. Deputy Governor Ben Broadbent and Sarah Breeden expressed concerns about persistent wage pressure, signaling a cautious approach. The focus remains on today’s UK CPI inflation numbers for further insights.
UK Inflation Expectations:
October saw a relief for UK consumers as energy price cap effects dropped out, reducing headline CPI to 4.6% from September’s 6.7%. November’s CPI is expected to further slow to 4.3%, aided by declining petrol prices. Challenges persist in services CPI (expected at 6.6%) and core CPI (expected at 5.6%). Any deviation in these numbers could impact gilt markets.
Silver Lining and Wage Growth:
Wage growth above 7% provides a silver lining, offsetting some of the economic challenges. While services CPI and core CPI are critical indicators, PPI inflation, currently in deflation since July, could influence headline numbers in the new year. Wages rising faster than headline inflation suggests a potential slowdown towards 4% in Q1 2024.
Currency Market:
EUR/USD: Potential move higher, requiring a break above 1.1015/20. A break above 1.1030 could target July peaks at 1.1275. Support at 1.0830.
GBP/USD: Potential for an upward move above the 200-day SMA at 1.2520, with resistance at 1.2800. Support at 1.2590.
EUR/GBP: Struggling below the 100-day SMA at 0.8640. A break targets 0.8700, with support at 0.8570/80. A move below 0.8580 targets 0.8520.
As markets navigate rate cut speculations, inflation data and central bank stances continue to shape investor sentiment.
