GBP lifted by sticky core CPI, risk mood remains muted

Headlines

* UK CPI stronger-than expected, 25bp September BoE hike fully priced

* RBNZ holds rates as expected, signals small risk of another hike

* S&P 500 finished below its 50-SMA for first time since March

* Asian stocks pressured following declines on Wall Street amid broad risk-off

FX: USD closed higher for a fourth straight day. The DXY is now trading around its 200-day SMA at 103.23. The 10-year yield made new highs at 4.26% before settling lower.  The 2-year yield popped up above 5% before closing below.

EUR is trading above 1.09. After breaking down on Monday through the 100-day SMA at 1.0930, prices are back to that level today. There was a slightly better than expected August ZEW survey from Germany. It showed an improvement in investor expectations this month (-12.3, from –14.7 in July). Markets were expecting little change.

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GBP is trading stronger today after the higher-than-expected CPI data. Stubborn core inflation will concern the BoE.  Peak rates are closing in on 6% so 75bp more rate hikes by March next year.

USD/JPY was little changed overnight trading above 145 despite downbeat sentiment. We’ve had a mild renewal of verbal intervention by Japanese government officials.

AUD fell to a fresh cycle low this morning at 0.6427 but has found a bid. The NZD is outperforming after the RBNZ lifted its projections to hint at the small chance of a rate hike next year. It also no longer sees chances of a rate cut by December this year.

Stocks: US equities sank to a five-week low on risk-off sentiment. The benchmark S&P 500 lost 1.16% to settle at 4437. The blue-chip index closed below its 50-day SMA for the first time since March. The tech-heavy Nasdaq dropped 1.10% closing at 15,037. The Dow closed lower by 1.02% finishing at 34,946. Bank shares fell afterFitch warned that the agency was considering lowering multiple bank ratings.

 Asian were pressured after Wall Street declines.  Chinese stocks were lower amid growth concerns. The Nikkei 225 fell below 32,000.

US equity futures are in the green. European equity futures are higher (+0.24%). The Euro Stoxx 50 closed down 1.0% yesterday.

Gold continues to flirt with the 200-day SMA at $1904. Below here is the June low at $1893 and a long-term Fib level at $1894. Surprisingly strong US retail sales bolstered the case for a rate hike.

Day Ahead – Fed minutes to support USD bid

The positive upside surprise in US retail sales yesterday kept the DXY above 103. Industrial production is expected to return to growth later today and confirm the ongoing resilience in the economy. We also get the FOMC minutes later today which should be the last big event from the Fed before next week’s Jackson Hole symposium.

Fed officials are closing in on the end of their tightening campaign. That means the debate is shifting from how high interest rates need to go to how long they should stay elevated. Inflation pressures are easing, which could give policymakers room to keep interest rates at or near current levels for the time being. But they may not declare victory just yet, and not in the minutes. Otherwise, this would undo their previous work in bringing inflation closer to their target.

Chart of the Day – Elevated core UK CPI helps GBP

This morning’s UK inflation data beat estimates in both the core and the headline. The latter will grab the headlines as it fell sharply to 6.8% from 7.9%. This was mainly down to the lowering the energy price cap. But it is the core gauge which will concern the BoE which remained unchanged at 6.9%. Services inflation also ticked up which is another worry for policymakers.

Markets now fully price in a 25bp rate hike in September, with a small chance of a bigger half-point move. The peak rate is now close to 6% implying three more 25bps rises in total. GBP/USD has jumped 50 pips having formed a base above 1.2620 last week. Buyers will be looking to push on to the upper 1.27s and the 50-day SMA. Last week’s high at 1.2819 will also be eyed.