UK’s better-than-expected CPI lifts sterling

• UK inflation print highest in nine years.

• Lackluster Chinese data adds to market concerns.

• US inflation outlook little changed despite moderating August data.

The UK’s August CPI rose 3.2% year-on-year to print at its highest level since March 2012. The better-than-expected numbers offered a gentle lift to the pound which is gaining against most of its G10 peers at the time of writing.

The latest UK inflation figures underscore the buildup in inflationary pressures that are evident across developed economies, while ramping up expectations that central banks may have to ease their foot off the stimulus pedal sooner rather than later. With markets now pricing in an 82% chance of a BOE rate hike in May 2022, that should help create a supportive environment for sterling. The Old Lady is further down the line compared to other major central banks in its quest to normalise policy settings and all eyes now turn to the MPC meeting next week.

China’s cooling recovery could dampen sentiment

Asian stocks are a mixed bag on Wednesday, with disappointing economic data out of China souring risk sentiment in the region. China’s moderating recovery is adding to the angst surrounding regional assets, while exposing yet again the risks that the Delta variant poses to the global economy. Considering the world’s exposure to the Chinese economy, the slowing momentum in growth might add another headwind to risk appetite.

Still, US equity futures are edging higher, as stock bulls dust themselves off after the S&P 500 fell in six out of the past seven sessions. Meanwhile, the dollar index has erased all its losses incurred during the knee-jerk response to the lower-than-expected August US inflation readings. However, gold prices have managed to hang on to most of their gains since, still clinging to the $1800 handle for the time being.

Dollar outlook supported by expectations for Fed tapering

The latest US CPI data doesn’t significantly alter the inflation outlook, though it is showing signs that inflationary pressures are waning, potentially affirming Fed Chair Jerome Powell’s ‘transitory’ views after all. Yet market participants are holding on to expectations that the Fed’s tapering will commence before 2021 is over, while the Fed funds futures still point to a greater-than 70% chance of a US rate hike in December 2022. Such a hawkish narrative should buffer the greenback’s resilience, which was brought to the fore once more following the latest US inflation release.