Inflation is being driven by the high price of energy but also housing in the UK. The Bank of England is more likely now to raise rates again in February with market analysts predicting by another 25bps. This should drive the pound higher until the Fed starts its rate hike cycle.
Market brief
It has been a busy start to the European session today, with UK inflation data dominating the headlines as well as the rising probability that PM Johnson receives a vote of no-confidence soon. Candidates for his replacement include Rishi Sunak and Liz Truss but they have both backed the PM.
According to the UK Consumer Price Index including owner occupiers' housing costs (CPIH), prices rose by 4.8% between November and December 2021, compared to 4.6% between November and December. According to the CPIH 12-month inflation rate for December 2021, housing and household services were the largest contributors.
In December 2021, CPIH climbed 0.5%, compared with 0.2% in December 2020. A rise in the CPIH 12-month inflation rate between November and December 2021 was driven most notably by food and non-alcoholic beverages, restaurants and hotels, furniture and household goods, and clothing and footwear.
In the 12 months to December 2021, the Consumer Price Index (CPI) rose by 5.4%, up from 5.1% in November. In December 2021, CPI increased by 0.5% compared with 0.3% in December 2020.
The UK yields have all been on an upward trajectory since the Bank of England raised the bank rate by 15bps and this has also translated into an appreciation in the pound against the major currency crosses. The market is currently pricing in another 25bps rate hike in February.
However, this morning’s forex heatmap is showing a move into the safe-haven currencies and flows out of the global reserve and pound. The New Zealand dollar is currently the strongest of the currencies we follow.
I am still of the belief that the GBPUSD will go higher and test the 1.3840 high but that price will compress (correct over time) whilst the 20 & 50 period EMA’s are under the daily 200 EMA. Once the momentum has shown strength it normally leads the price action. For now I am watching to see if the decline in the GBPUSD into the 20 and 50 EMA aligns with the Stochastic (10,3,3) becoming oversold as the oscillator can help confirm a buy the dip opportunity.
Retail traders on the ActivTrader platform are bearish the GBPUSD with only one-third willing to push for higher highs. As the bearish sentiment increases the probabilities lay in the bull's favour as there is bound to be a short squeeze sometime between now and February.
Later on, we receive notice from the Bank of England Governor.
The IEA has raised its estimates of global oil demand by 200k barrels per day in 2021 and 2022 as nations to open up more than expected due to softer COVID restrictions. Global oil demand is set to increase by 5.5mln barrels per day in 2021 and 3.3mln BPD in 2022. The report states that OPEC+ oil output could increase by 4.4mln BPD in 2022 but that effective spare capacity will be just 2.6mln BPD by the end of 2022.
The Brent contract is slightly weaker this morning but whilst the price action is above the breakout level of $86, trend followers will be looking to add to their positions on pullbacks to support levels. This afternoon there will be US API weekly oil stock figures plus the US building Permits data to look forward to.