The UK will see the release of November inflation figures at 0930 GMT on Tuesday. Annual inflation is expected to grow by 3.0%, the same more-than-five-year-high pace that was recorded in October and September. The pace of inflation has implications for the rate hike path that is to be implemented by the Bank of England.
Month-on-month, CPI is anticipated to have grown by 0.2% in November, exceeding the 0.1% pace that was recorded in October, while the 3.0% y/y rate projected by analysts compares to the BoE’s target rate for inflation of 2.0%. Core inflation, the measure that excludes volatile food and energy items, is expected to grow by 2.7% on an annual basis in November, the same as in the preceding three months which is also the highest since late 2011.
An upside deviation from inflation forecasts is expected to push sterling higher as market participants will likely push their expectations for an additional rate hike by the BoE – after the one delivered in early November – closer rather than later in time. In such an event, resistance to up movements in price could come at around the 11-week high of 1.3549 that was recorded on December 1. Notice that late September’s 17-½-month high of 1.3656 lies not far above this level – the area around this peak could act as a barrier to stronger bullish movements further ahead by the pair. For the record, markets currently expect the BoE to hike rates by 25 bps – for the bank’s target rate to reach 0.75% – by late 2018.
Should inflation forecasts fall short of expectations, then sterling will likely weaken as more questions about how fast the central bank will deliver additional interest rate increases would emerge. A declining pound/dollar could meet support around the current level of the 50-day moving average at 1.3243.
One should not forget though that in the case of the UK, things are not as "binary" as might be in the US or the eurozone for example where inflation is running below the respective central banks targets and where a higher reading would definitely be welcome. In the UK, higher-than-anticipated inflation might raise hopes for interest rate hikes to be delivered sooner, but is also eating out of consumers’ purchasing power (as inflation is outpacing wage growth), affecting their spending habits and thus the outlook for growth which either way is not looking that bright at the moment; a weakening growth outlook is also acting to the detriment of the outlook for monetary policy normalization. Besides this, it should be taken into account that other releases out on Tuesday also have the capacity to move sterling. Producer prices and retail price inflation (a measure used to calculate payments on instruments such as index-linked government bonds and other contracts such as indexed-pensions) for November will me made public at the same time as the aforementioned CPI figures.
Other forces driving sterling throughout the week are of course developments on the Brexit front. Following last week’s breakthrough, it is expected that by the end of the EU summit taking place on Dec. 14-15, the EU heads of state will formally decide that negotiations should move to the second stage, that of determining the future relationship – including trade talks – between Britain and the EU. In terms of data, Wednesday will see the release of November’s claimant count, as well as October’s unemployment rate and average earnings. Linking the latter to what was previously mentioned, it would be interesting to see to what extent the divergence between price pressures and wage growth, which acts to the detriment of households’ purchasing power, continues. Thursday will see the release of November’s retail sales while the completion of the BoE’s two-day meeting on monetary policy will complement the day. The bank is widely expected to hold its benchmark rate steady at 0.5%.
