- UK inflation surge ramps up BOE December rate hike prospects.
- Asian stocks lower despite Wall Street gains.
- Better-than-expected US retail sales boost the dollar.
- Oil weighed down by supply and demand risks, stronger buck.
Inflation in the UK last month climbed 4.2% compared to October 2020, beating market estimates for a 3.9% print. That’s the steepest year-on-year surge for the CPI in nearly a decade, while the core and month-on-month figures also exceeded median forecasts. The inflation overshoot prompted cable to test the Tuesday high at 1.3472, with the pound still the only G10 currency to have advanced against the US dollar so far this week.
The case for a rate move by the BOE has been strengthened by rising inflationary pressures, along with signs of an improving labour market last month even after the government’s furlough scheme came to an end. Economic data is seemingly paving the way for a December rate hike and such prospects should translate into support for the pound over the near-term.
Dollar’s resilience buffered by robust Retail Sales data
The pound’s advance this morning has weighed on the greenback, dragging the benchmark dollar index (DXY) back below the psychologically important 96.0 level. Still, dollar bulls were encouraged by Tuesday’s US economic data releases, as retail sales and industrial production both grew at their fastest pace since March. The robust data also helped the S&P500 and the Nasdaq Composite indices move within touching distance of their all-time highs. Futures are little changed at the time of writing.
The latest figures out of the world’s largest economy speak of resilient spending levels even in the face of stickier inflation. If the US economic recovery remains steadfast, the Fed’s concerns about the potential negative effects of a rate hike should ease.
However, October’s stellar retail sales growth ought to be read alongside the early-November slump in consumer sentiment. If the spike in spending last month was mere front-loading before prices get higher or supply disruptions become more severe during the peak holiday shopping season, then such elevated consumption may not be sustainable. Signs of waning growth momentum, alongside consumer prices that stay stubbornly higher, could in turn trigger significant losses in risk assets.
Oil struggles amid threat of strategic reserves release
After advancing in six of the past seven months, oil benchmarks have refused to climb higher so far in November amidst a narrowing backwardation. Worrying headlines about the resurgence of Covid cases in major European economies are fueling demand-side concerns while over on the supply side, news of a possible joint release of strategic reserves by the US and China are also capping oil’s gains.
If President Biden succumbs to the political pressures from voters as well as from party colleagues and announces a release of the Strategic Petroleum Reserve, that could force oil prices to pare more of the year-to-date gains which currently stand at over 60%. Oil may also retreat further if the EIA announces later today that US crude stockpiles have increased for a fourth consecutive week. Overall, upside momentum has stalled and might not need much of an excuse to pull back, even as it continues to battle against the resilient US dollar.
