November 17, 2021 15:37:48

Surging UK inflation data this morning, coupled with a strong jobs report yesterday has sealed the deal for a rate rise by the Bank of England next month. We do get one more labour market update before that MPC rendez vous. But resilience in this area of the economy is the final missing piece for the bank to kick off a potential tightening cycle.

Of course, the market may be wary about the reappearance of the “unreliable boyfriend”. However, Governor Bailey recently said he was “very uneasy” about prices rises in the UK. Next April will see another big increase in CPI due to a jump in the energy price cap.

Money markets are currently pricing in a 60% chance of a 25bp rate rise this year. There is a chance the MPC will have to hike faster next year to avoid runaway inflation expectations. Its next “super” meeting (MPR) with updated forecasts is not until February.

In contrast, the euro is bedevilled by dovish policymakers and a rapid fall in EUR/USD. The steep rise in European gas prices is not helping. Rising Covid restrictions on the continent may also affect growth this quarter.

EUR/GBP weekly chart sees prices on support level

We’ve had five straight days of losses in this pair. Prices were capped at the start of the month by the 200-day SMA at 0.8575. Since then, sellers have moved swiftly through August support at 0.8450.

The late October low at 0.8402 represents the last major support level. A strong close below here could test long-term support at the 2019 and 2020 lows at 0.8281/75. The halfway point of the upmove from 2015 sits at 0.8215. Near-term resistance moves to 0.8438 and 0.8402.

Brexit issues and the trigger of Article 16 by the UK could slow any descent in this cross. The October low is certainly a key level that must hold in the near term.