Forex Today: UK Inflation Exceeds Forecasts as Markets Expect BoE Hike

UK inflation has exceeded expectations, increasing pressure on the Bank of England ahead of its 5 November policy meeting. Before today’s release, economists expected annual headline CPI to rise from 3.1% to 3.4%, but it has reached 3.5%. A 0.25% November hike was already almost fully priced in, so the more important question is whether the surprise strengthens expectations of another increase in December. Before the release, markets assigned approximately a 61% probability to that second hike.

Sterling’s reaction will depend on expectations beyond November. A higher inflation reading is not automatically a strong buying signal when the next rate hike is already anticipated. For a sustained bullish response, traders would probably need to price a higher eventual Bank Rate. GBP/USD was trading near 1.3374 before the release, benefiting from the broader retreat in the US Dollar. However, since the release, the price of GBP/USD has actually been moving lower.

In the Forex market, the US Dollar has weakened as Treasury yields eased. The US Dollar slipped to a three-week low yesterday and remains under pressure this morning. EUR/USD is near 1.1229 and USD/JPY around 158.33. This is a change from the Dollar’s earlier strong advance, although the Euro’s recovery remains very modest against the background of France’s fiscal and political difficulties. It will not be a surprise if we see continued weakness in the EUR/USD, and like most trend traders, I will remain short of it below 1.1300.

Stock markets mostly recovered yesterday, as positive earnings data supported sentiment. Wall Street advanced yesterday, and Asian equities are higher this morning as early corporate results encourage confidence in profits. The recovery is welcome after the technology-led selloff, but a rebound alone does not confirm that the major indices are ready to make fresh record highs.

Crude Oil remains elevated despite renewed diplomatic efforts between the USA and Iran, as the prospect of a resumption of the war within weeks starts to look very real. Iran has continued to threaten and attack Saudi Arabia. Brent is near $110 after another volatile session, with continued Houthi attacks and threats to Gulf shipping supporting the supply-risk premium. Traders are also assessing mediation between Iran and the US. WTI is testing likely resistance at the big round number of $100.

Bitcoin has recovered above $82,000 and invalidated a resistance level in that area, which is a minor bullish sign. Bitcoin is near $83,000 and Ether around $2,453. Bitcoin’s recovery improves the immediate picture after repeated tests of the $80,000–$82,000 area, but it remains below the previously identified breakout threshold around $87,293. Ethereum is still beneath $2,544, leaving its former bullish consolidation less convincing. Like many trend traders, I remain long of Bitcoin above $80,000.

Gold remains below the important $4,200 resistance level. Spot Gold is near $4,118 this morning and is heading for a fourth consecutive daily decline. A softer Dollar has not been enough to produce a sustained recovery, while high Crude Oil prices continue to complicate the inflation and interest-rate outlook. I would still want to see Gold establish itself above $4,200 before treating the recent bounce as a more convincing bullish reversal.

There will be a release of New Zealand inflation data later not long after the New York close.