GBP News Alert: As UK inflation rises above 10%, the currency pair declines

Oct 19, 2022
VOT Research Desk

Market Insights, Considerations & Analytics

Key UK CPI Insights

From 9.9% in August, the UK CPI increased by 10.1% annually.

Oils, fats, and dairy products made up the majority of the increase in food prices (14.8% vs. 13.4% in August).

Against expectations of 6.4%, the Yearly Core Rate has risen to a record-high of 6.5%.

Inflation in the UK increased in September, above expectations and tying the 40-year peak reached in July. Consumer prices increased 0.5% from each 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The majority of PM Truss’ mini-budget recommendations have been rescinded as a result of this week’s comments by UK Chancellor Jeremy Hunt.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 program, 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 funding package will have an impact on businesses and consumers alike, with an increase in inflation as a result.

Positively, the recent revelations by the chancellor should eliminate the need for the Bank of England (BoE) to raise interest rates by 100 basis points in November. Before the budgetary U-turn, the probability of a 100bp rate increase was closer to 100% than it is today (66%). Given the effects that higher rates have had on the property market and the cost of living, the BoE may have made the right decision by raising rates by 75 basis points. The Bank of England still has a tough challenge ahead of it and has a lot to think about before 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 support 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.

Important Intraday Levels to Monitor:

Areas of Support

1.11500

1.10000

Areas of Resistance

1.15000 1.17500