UK CPI set to hit record high above 9%

There was a much more positive mood around European markets yesterday, with some decent gains across the board. US markets followed suit, helped by a decent April retail sales report, which showed that despite rising prices, US consumers remained resilient.

This positive US finish looks set to translate into a flat European open, with the pound and euro riding higher on expectations that both the Bank of England and ECB might have to raise rates more aggressively in the coming months than originally the markets had been pricing, as we look ahead to a day which is expected to see a record high for UK CPI.

Over the last six years it’s generally been one of life’s truisms that when you hear people starting to predict that the pound is on course for a move towards parity against the US dollar, its usually time to start buying it.

While there is always a risk of a move lower, while we’re above key support at 1.2000 it would be unwise in the extreme in thinking in terms of such move, and yet we still get the same absurd parity calls whenever the 1.2000 level comes into view.

Furthermore, with hedge funds and short positioning rising to their highest level since 2019 at £5bn such a move starts to become a crowded trade, and as such vulnerable to the type of short squeeze we saw yesterday, as the pound saw its biggest one day rise since October 2020, after the latest UK unemployment data showed that there are fewer unemployed people than there are job vacancies.

UK unemployment fell to its lowest levels since 1974 in March to 3.7%, while average weekly earnings rose to 4.2%, and when bonuses were included rose to 7%, a sharp rise from the 5.4% we saw in February.

This set to go higher in April if you factor in that UK retailers announced inflation busting pay increases, for their staff of over 5%, earlier this year and which are due to kick in this month. This suggests that next month’s April wages numbers, could well see wage growth rise close to 6%.

Even allowing for Bank of England governor Andrew Bailey’s rather ham-fisted attempts to caution against sharp rises in wages, markets are now pricing in that the Bank of England will have to raise rates much faster, than it would like as it wrestles with the dilemma of either allowing inflation to slow the economy or raise rates much more quickly to help bring it under control more quickly.

This pressure is likely to increase further with the release of today’s headline CPI number, which is expected to be ugly in the extreme, as the energy price rise of 54% expected to help push the headline number up above 9% to a record high of 9.2%.

Not only are consumers having to contend with higher gas and electricity prices, but also higher food and petrol prices, along with higher council tax, streaming subscriptions, gym memberships and other discretionary costs, as well as a pound that is 9% lower against the dollar from a year ago when it was at $1.3900.

While headline CPI is expected to rise from 7% to over 9%, core prices are expected to from 5.7% to 6.2%, while RPI is expected to rise from 9% to 11%, and a 40 year high.

Imported goods are likely to make up a decent proportion of this latest inflation surge, and with PPI input and output prices surging in March to 19.2% and 11.9% respectively, further rises in headline inflation are coming even without the April tax rises, and the rise in the energy price cap.

PPI has always tended to be a leading indicator when it comes to headline inflation, with businesses having to make the tough decisions of whether to absorb the costs of producing the goods and services they sell or pass those costs on. PPI output prices are expected to rise to 12.5% in April and input prices to come in at 20%.

The euro also had a solid day yesterday, rallying on comments from Netherlands Governing Council member Klaas Knot who said that the prospect of a 50bps rate hike was a possibility at the July meeting of the European Central Bank, although it wasn’t a base case.   

EUR/USD – Having held above the 2017 lows at 1.0340 last week, we’ve seen a short squeeze back through 1.0500, with the potential for a move back towards 1.0650. The bias remains for a move lower towards parity, while below 1.0650.

GBP/USD – Yesterday’s strong rebound through 1.2300, needs to take out the 1.2630 area to signal a short-term base is on. The move through 1.2400 is encouraging and needs to hold for a test of 1.2630 or risk a return to the recent lows.

EUR/GBP – Slid briefly below the 0.8420 area before rebounding. The previous support at the 0.8470/80 area now becomes resistance, with a bias for a move below 0.8400 towards 0.8370/80. 

USD/JPY – Last week’s failure at the 131.35 area has the potential to see a move towards 126.80. If that holds then the 135.00 area target remains intact. A move below 126.80 targets the 123.00 area.

FTSE100 is expected to open 4 points lower at 7,514.

DAX is expected to open unchanged at 14,185.

CAC40 is expected to open unchanged at 6,430.