United Kingdom Inflation Rate

The UK GDP revealed that the economy shrank by only 0.2% in 3rd Quarter, which means that a contraction of more than 0.55% may be needed in the last three months of the year for the BoE’s forecast of a 0.75% contraction during H2 2022 to materialize. Yet, investors dragged their rate-path projections lower. The probability for a 50bps hike at the December gathering renamed near 80%, but the implied terminal rate was lowered to 4.47% from 4.6%.

The jobs report is forecast to show that the unemployment rate held steady at 3.5% in September and that the average weekly earnings excluding bonuses have accelerated. With an inflation rate at 10.1% during that month, real wages likely stayed well into the negative territory and disposable incomes at record lows.

Investors concerns over a worst 4th Quarter are more than reasonable, and Wednesday’s inflation data have the potential to enhance them. The headline rate is expected to have continued to rise, hitting 10.8% y/y, though the core rate is expected to have ticked down to 6.4% from 6.5%. This implies that the surge in the headline rate may be due to volatile items like food and energy, and the recovery in oil priced during October corroborates that view.

Expectations for the upcoming events keep the risk of another round of selling in the foreseeable future firmly on the table, despite pound/dollar rising above a medium-term downtrend line. It’s because dollar weakening on the US inflation data rather than the pound strengthening. The pound’s link to the broader market sentiment has strengthened this year due to the UK’s twin deficit, but its correlation with the S&P 500 remains weaker than other traditional risk-linked currencies, like the aussie the kiwi and the Lonnie.

A break below the 1.1145 barrier may be needed to signal that the prior downtrend is back in force. That move would confirm the pair’s return below the downtrend line and may initially target the low of October 12 at 1.0920. Should that zone get breached as well, the bears may set the stage for extensions towards the 1.0535 territory.