IFX Market Report

UK inflation soars fuelling rate rise fears

The UK Consumer Price Index (CPI) released yesterday came out much higher than expected at 2.9% up from 1.9% in November. That was the biggest jump in the annual rate from one month to the next since records began, and exceeded the market's expectations of 2.6%. The Retail Price Index (RPI), which includes housing costs, rose to 2.4%, its highest level since November 2008. This was a rise from 0.3% in November and also constitutes the biggest monthly rise in the annual rate of RPI inflation since 1979.

In a speech last night, BoE Governor Mervyn King said that inflation was likely to rise to over 3% in the coming months although it should return to target in the medium term. Inevitably the question is now being raised whether, to maintain its credibility, the MPC may well have to raise interest rates from their record low levels.

The January German ZEW economic expectations index fell to 47.2 from 50.4 in December, below expectations and the fourth consecutive monthly decline. The data indicates a further reduction in investor confidence. Yesterday EUR/USD came under renewed pressure and having dropped below its much-watched 200 day moving average at $1.4295, its decline has accelerated this morning, falling below $1.4200

Traders will keep a close eye on the BoE's December meeting minutes due out at 0930 GMT for further clues on the direction of its asset buying programme. Many market players expect the BoE to pause on QE when new growth and price forecasts are compiled next month.

At 0915 GMT the pound has held steady against the euro at 1.1469 but came off a six-week high against the dollar hit the previous day as the U.S. currency gained broadly against a basket of currencies.

GBPAUD 1.7769, GBPCAD 1.6850, GBPJYP 147.89, GBPDKK 8.5226, GBPZAR 12.1640, EURUSD 1.4214.    

12.05 ZAR, 148.399 JPY, 11.43 SEK and AU$1.7543. The euro made further headway against the US dollar at $1.4507

Today’s key economic data

UK BoE minutes (Jan) 09:30 -- -- --

UK Unemployment (Nov) ILO 09:30

UK Average Earnings (Nov) 09:30

US Housing starts (Dec) 13:30

Intraday Support and Resistance