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US Risk-Off Mood Continues Ahead Of CPI Inflation Data as Brexit And Supply Issues Weigh On Eurozone’s Single Currency

UK Interest Rate Likely To Rise In December

Market focus on a UK hike hit mainstream news with the probability of a December rate hike increasing to 68%. Inflationary pressures remain evident as average weekly earnings were 7.2% higher than in the same three months of 2020, slowing from the previous reading of 8.3%. The unemployment rate edged down to 4.5% in the three months to August from 4.6% in the May-July period. Sterling reaction was muted due to the furlough factor with a reported 1.6 million on the scheme in July which provides a false economy to these numbers.

In the meantime, Brexit concerns remain as Minister Frost stated that we are now facing a serious situation on the Northern Ireland protocol and that it will be impossible to move further without significant change. This coupled with ongoing supply chain issues mean that markets are continuing to watch these developments.

There have been a few data releases out this morning from the UK. The latest monthly UK GDP data recorded a 0.4% increase, slightly below expectations whilst manufacturing and industrial production beat expectations.

Looking to the remainder of the day, with an early interest rate hike at the forefront in the UK, the market will focus on Bank of England (BoE) Deputy Governor Jon Cunliffe to see if he drops any clues on the matter.

US Risk-Off Mood Continues Ahead Of CPI Inflation Data

Investors remain in a cautious mood ahead of the release of Core Inflation (CPI) data today. A reading above the consensus estimate of 5.3% may stimulate the Federal Reserve (Fed) into tapering their bond-buying programme in November. Recent CPI releases have either been aligned with or above consensus, although in only a couple of instances did the US Dollar index strengthen following the positive release. While this suggests the Dollar doesn’t always react positively following a stronger inflation reading, a reading above expectations ahead of the FOMC November meeting may pave the way for an announcement on tapering. The September survey of consumer expectations showed that median inflation expectations over the next 12 months jumped to a record high of 5.3% from 5.2% in August. Three-year inflation expectations also increased from 4% to 4.2%.

Today markets will turn attention to the minutes of the Fed’s latest policy meeting which will shed light on the timeline of the Fed’s action. Later this evening Fed Speaker Lael Brainard may offer further guidance on the level of support for a rate hike in late 2022.

Brexit And Supply Issues Weigh On Eurozone’s Single Currency

The Euro made 15-month lows against the US Dollar due to Brexit concerns and supply-side issues. Brussels will formally propose a new Brexit agreement on Northern Ireland with the UK this afternoon in a move that will significantly reduce ‘red tape’ surrounding the movement of goods into the region. The proposal includes having two lanes, a ‘Green Lane’ for movement of goods into Northern Ireland which will have greatly reduced customs checks and another ‘Red Lane’ for goods moving beyond Northern Ireland into the Eurozone which will remain mostly unchanged. The EU’s new agreement rests on two key factors, the first being the continued oversight of the region by the European Court of Justice (ECJ) Judges and the second that they are given access to real-time access to UK trade databases to police customs into the Republic of Ireland. The former point remains contentious with the UK who believe the ECJ should be replaced with an international arbitration modelled on the Brexit agreement but did not say it would be a deal-breaker. We await the press conference with Maros Sefcovic at 17:30 today for further details.

Looking ahead at today, it is another quiet day on the EU macro-calendar with no notable data releases. We do have both German Final CPI month-on-month and EU Industrial Production month-on-month figures out this morning, but neither are expected to provide much direction for the Euro.

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