The latest data on US consumer prices indicated the risks the economy will incur if the Federal Reserve does not start to act more aggressively. Meanwhile, pound slipped after UK officials urged the EU not to panic or fuss over the proposed changes to the post-Brexit trade agreement.
As mentioned earlier, US consumer prices continued to rise in October at their fastest pace since 1990. This means that the US economy has recovered quite strongly from the coronavirus pandemic and no longer needs stimulus measures. Sharp inflationary pressures are already negatively affecting the purchasing power of households, even in the face of rising wages.
To be precise, CPI is up 0.9% m / m and up 6.2% y / y. Both surpassed the estimates of economists, which led to a surge in volatility in the stock and foreign exchange markets.
It was the higher prices for electricity, housing, food and vehicles that led to such inflated rates, which accordingly resulted in the increase of 10-year bond yields and dollar rates. Meanwhile, strong corporate earnings boosted the prices of consumer goods and services, as evidenced by the rise in the producer price index. Serious pressure on supply chains and a shortage of skilled workers also led to increased costs for business owners, which were quickly shifted onto the shoulders of average consumers.
The data will most likely influence the future decisions of the Federal Reserve, especially since the central bank expects that high inflation will persist until the end of this year. If this happens, Fed officials will be forced to act more aggressively, which will lead to a sharper decline in bond purchases and earlier increase in interest rates.
The data could also pose political problems for US President Joe Biden and the Democrats as they seek to pass a nearly $ 2 trillion tax and spending package, as well as defend a slim congressional majority in next year's midterm elections. A serious rise in inflation will definitely not help them in achieving these goals.
Of course, there is a solution to this problem - replacing the incumbent chief of the Federal Reserve, Jerome Powell, who is a Republican. But this can create certain problems and pressure on the stock market, which is significantly overheated by stimulus measures.
In any case, Lael Brainard was reportedly interviewed by Biden recently, which indicates that the president is still pondering on who to designate as the leader of the central bank for the next four years. Powell's term ends in February next year, and Biden said he would make a decision quickly. Powell and Brainard are the only people who have publicly announced their fight for the seat.
But the fact that inflation is hurting the wallets of Americans does not exactly add to the credibility of the Democratic Party in the midterm elections. As such, the White House has been repeating lately that energy prices are a key driver of growth and that its administration is working on ways to cut those costs.
With regards to other statistics, the US Department of Labor reported that housing costs rose 0.5% in October because of higher rental rates. Prices for new cars have also increased by 1.4%, this time due to a widespread shortage in semiconductors. Used car prices also jumped 2.5%, food prices rose 5.3%, gasoline prices rose 6.1% and electricity costs rose 1.8%. Most likely, growth will continue this fourth quarter, but resolving problems in the supply chains could mitigate inflationary pressures.
Immediately after the release of these data, an interview was held with San Francisco Fed President Mary Daly. She said she expects high inflation to decrease after COVID-19 recedes, and reiterated that it would be "premature" to raise rates now or cut back on a larger bond purchase program. She also noted that high inflation is caused by narrow problems in supply chains and high consumer demand for goods.
Talking about EUR / USD, a lot currently depends on the base of the 15th figure because dropping below it will result in a further fall to 1.1460 and 1.1410. Meanwhile, a jump above the level will lead to a rise to 1.1560, and then to 1.1640.
UK
Pound fell yesterday immediately after the release of the US inflation data. At the same time, there was not much optimism even though the UK authorities called on the European Union to remain calm amidst the escalating dispute over Northern Ireland. The EU's chief Brexit negotiator has warned that new negotiations aimed at avoiding a severance in trade relations are going very badly.
"I gently suggest that our European friends should stay calm and keep things in proportion," said UK Brexit Secretary David Frost. He spoke immediately after reports that the EU is considering ending the free trade agreement with the UK if Boris Johnson's government fulfills its threat and unilaterally suspends part of the agreement on Northern Ireland.
At present, the UK and the EU are involved in a new round of negotiations related to their relationship after Brexit. UK has called for a revision of the Northern Ireland protocol, but if the EU does not agree, it threatened that it will apply Article 16, which allows for a limited suspension of the deal.
Of course, this is damaging to GBP/USD, but for now a lot depends on 1.3470 because a breakdown will result in a deeper fall to 1.3425, 1.3370 and the bottom of the 33rd figure. Meanwhile, a rise to 1.3560 will lead to a further increase to 1.3600 and 1.3650.
