Home Daily Commentaries Pound slips as UK inflation hits 10.1%

Pound slips as UK inflation hits 10.1%

Daily Currency Update

The pound has slipped this morning as UK inflation data rose more than expected adding to the spending squeeze UK consumers face over the coming months. The Consumer Price Index for September rose 10.1% y/y up from 9.9% and higher than the 10% that had been expected.

September's number is often closely watched as it is usually used as the reading by which benefits, including the state pension, are raised. Under the so called "triple lock" system, the state pension is increased according to whatever is higher from earnings growth, price rises, or 2.5%, and the new Chancellor of the Exchequer, Jeremy Hunt, has made it clear that this commitment may not be met by the new government given its aim to reduce the budget deficit. There has also been news that banks and energy companies may be subjected to a windfall tax to fill the gap in the government’s finances as PM Liz Truss's original budget plans are abandoned by the new Chancellor.

The pound has fallen on the release with GBP/USD dropping back under 1.13. As mentioned previously in these updates, higher than expected inflation generated by strong domestic output usually benefits a currency. However having to hike interest rates in the face of an economy slipping into recession tends to be bad for the currency, and its looking like the Bank of England are going to have to implement its biggest ever interest rate hike since it gained independence from the Government in 1997.

BoE Governor, Andrew Bailey, is predicted to confirm a 75bp or even a 100bp hike at its November 3rd policy decision in an effort to control price rises. Later today, beleaguered Prime Minister Truss will face the House of Commons for Prime Minister's Questions for the first time since being forced into tearing up her economic plan and sacking Kwasi Kwarteng as Chancellor. It’s likely to be a lively debate with many calling her a ‘lame duck’ PM and Hunt effectively leading the country. GBP/USD is down to around 1.1280 with GBP/EUR at around 1.1480.

Key Movers

It’s a risk off start to the financial markets today with most stock markets starting the day in the red with the safe haven US dollar being a natural beneficiary. UK Gilt and US Treasury yields are pushing higher, likely on the back of the UK's higher than expected CPI print and commentary from Minneapolis Fed President, Neel Kashkari, and Atlanta Fed President, Raphael Bostic, that continues to echo the mantra that higher rates are needed in the US in an effort to bring inflation under control.

Yesterday saw the closely watched German ZEW Economic Sentiment print a better than expected -59.2 however this is still deep in pessimistic territory. Any reading less than 0 means that more respondents to the survey are pessimistic than optimistic about the health the of the German economy, which is very likely already in recession. It’s the eighth successive negative print to the survey, suggesting that it’s going to be a hard winter for the Eurozone’s powerhouse economy, despite reports that it should have enough gas supplies to keep its economy going through the winter unless we see a particularly cold snap. EUR/USD trades at around 0.9835.

Expected Ranges

  • GBP/USD: 1.1225 - 1.1360 ▼
  • GBP/EUR: 1.1425 - 1.1545 ▼
  • GBP/AUD: 1.7800 - 1.8000 ▼
  • EUR/USD: 0.9780 - 0.9930 ▼