GBP gains after UK inflation unexpectedly rises again

A cautiously risk on mood is helping to lift UK and European stocks early Wednesday, building on strong gains from yesterday. 

• UK inflation rises 5.5%, against 5.4% forecast
• US retail sales are expected to rebound strongly in January
• Fed minutes could shed light on whether to expect a 25 or 50 basis points rate hike in March

European bourses rebounded on Tuesday, recouping losses from earlier in the week on reports that Russia was pulling some of its troops back from the border with Ukraine. The move, in addition to Russia continuing talks with the US and NATO, created a cautious optimism that the Russia- Ukraine conflict could still be resolved through diplomatic means.

Stocks in Europe are pointing to a mildly higher start, in cautious trade. The situation in eastern Europe remains fragile and could change course rapidly. The markets will continue to monitor developments closely over the coming days.

UK inflation

Inflation in the UK unexpectedly ticked higher in January to 5.5%, up from 5.4%. Rising energy bills and higher wages contributed to pushing inflation to its highest level in almost three decades. The data, combined with yesterday’s upbeat jobs report, despite Omicron, could encourage the BoE to consider another rise in interest rates. 

The BoE hiked rates in December and again February in a bid to tame inflation, which is expected to reach 7% by the Spring.  The pound trades higher versus both the US dollar and the euro following the data. The FTSE is also pointing to mild gains.

US retail sales & Fed minutes

Looking ahead, US retail sales and the minutes from the latest Federal Reserve meeting could bring some fresh direction to the markets. Retail sales are expected to rebound in January, rising 2% MoM after falling -1.9% MoM in December when Omicron was spreading rapidly. Whilst retail sales are notoriously volatile, a better result could help shed light on whether 4-decade high inflation and the ongoing supply chain issues are impacting consumer habits. Strong retail sales would suggest that consumer activity is improving and would keep the Fed focused on its path to policy normalization.

The minutes to the latest Fed meeting are likely to be watched closely for any clues over how quickly the Fed is looking to move with rate hikes this year. The Fed meeting itself had few surprises as monetary policy was kept on hold, as bond purchases continued to be wound down. The Fed tee-d the market up for a March rate hike, but will that be 25 basis points or 50 basis points? The minutes could bring more clarity to the debate and could also reveal policy maker’s appetite for up to six rate hikes across the year. 

Whilst signals that the Fed is turning more hawkish could boost the US dollar, high growth tech stock could come under pressure, in a rotation out of tech which we have seen on many occasions in recent weeks, when hawkish calls get louder.