Record high Eurozone CPI highlights policymakers’ dilemma

Updated August 31, 2022

Headlines

*Eurozone inflation hits 9.1%, above estimates of 9% and July’s 8.9%

*Oil prices tumble again, down over 4% on recession fears

*China’s August factory activity falls for a second month

*New Russia gas halt tightens energy screw on Europe

US equities fell for a third straight day as higher rate expectations continued to hurt stocks. Both the broad S&P500 and the tech-heavy Nasdaq ended 1.1% lower. The VIX hit its highest level since mid-July though it retreated modestly late on. Asian stocks have traded mixed after China’s PMI printed slightly better than expected. European equities have turned red after opening up positive. US futures are pointing to a modest up day.

USD is looking to challenge recent highs this morning. This week’s multi-year top at 109.47 and 110 are the target for bulls. EUR has dropped below parity after higher-than-expected CPI data for the eurozone. GBP continues to sink as it makes new lows. USD/JPY broke higher this week and is consolidating ahead of the cycle high at 139.38. USD/CAD has broken resistance as oil falls rapidly. The July spike top at 1.3223 is the key upside level.  

Market Thoughts – UK CPI to go above 22%?

A Citigroup strategist recently grabbed the headlines predicting that UK CPI would rise above 18%. Now Goldman Sachs are warning that consumer prices could actually hit 22.4% next year if energy prices continue their upwards spiral. This comes after British households were hit with a projected 80% increase in their energy bills in the coming months.

Even if energy costs moderate, the venerable investment bank forecast that UK peak inflation is still likely to hit 14.8% in the new year. This is well above the 13.3% estimate by the Bank of England made earlier this month. It all bodes ill for sterling even though the MPC will keep hiking rates. GBP is heading for its seventh week of losses in eight as markets focus on the incoming big growth slump.

Chart of the Day – Cable struggling to break bearish momentum

GBP/USD made a new cycle low yesterday at 1.1621 after touching previous support/resistance at the mid-July low at 1.1759. But today has seen more selling as prices head for 1.16. Downward momentum will remain unless 1.1759 can be taken, and prices rise above 1.18 in the medium-term.

The downside target is the spike low from the March 2020 pandemic low at 1.1409. A long recession is likely with eye-watering levels of inflation on the cards. The new UK PM will offer more help to businesses and households to cope with rampant energy bills. Whether that just adds to the inflationary mix remains to be seen.

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