Inflation in the UK increased in September, above expectations and tying the 40-year peak reached in July. Consumer prices increased 0.5% from month to month while the core inflation rate reached a record high of 6.5%. Following a brief respite in inflation last month, this current rise in prices emphasizes the difficulties the UK economy and the Bank of England are experiencing as the winter months approach.
The majority of PM Truss' mini-budget recommendations have been rescinded as a result of this week's comments by UK Chancellor Jeremy Hunt. The goal is to calm and stabilize the markets after the sharp decline in the GBP and the increase in Gilt rates. The government's energy support package, which would have set a maximum on yearly household energy costs at GBP2,500 for the following two years, was the most significant statement. This, according to the chancellor, will only endure through April before becoming more focused. It is anticipated that the withdrawal of this support package will have an impact on businesses and consumers alike, with an increase in inflation as a result.
The latest announcements by the chancellor should prevent the Bank of England (BoE) from needing to raise interest rates by 100 basis points in November, which is a positive thing. Markets were likely pricing in a 100% chance of a rate increase of 100bp prior to the fiscal U-turn. A 75bp hike may be the best course of action for the BoE, given the implications that higher rates have had on the housing market and overall cost of living. The Bank of England will still have a challenging task and much to consider going into its meeting in November.
GBPUSD first spiked 30 pip lower in response. Since last week, there has been a robust surge, but yesterday, we encountered resistance near the level of 1.1400, and the price movement suggests a more significant decline.
The larger picture still leans in favor of the bears as resistance lies near the psychological 1.1500 level and 1.17500, and lower prices on the pair could be expected due to the US Federal Reserve's ongoing rate hike cycle. Bears may be given a chance for superior long-term positioning during upside rallies.
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