Cost Inflation in the UK Increases the Risk of BoE Hawkish Move in November
The UK’s pace of recovery increased in October, showed the indices of activity in the service and manufacturing sectors. Both PMI readings beat forecast by several points. Looking under the hood of the report, the rise of “prices paid” sub-index is striking. Costs inflation that firms face is at its highest level in 25 years. Delays in supplies and labor shortages continue to be the main drivers of the rise in the cost of factors of production. Risks of higher consumer inflation, caused by rising costs, may force the Bank of England to raise rates prematurely, which is expected by a good share of market participants.
PMI in the Eurozone, on the contrary, turned out to be softer, showed the data which also came out today. Activity in the services sector slowed the pace of expansion compared to the previous month. The dynamics also fell short of market expectations. However, both PMIs are above 50 points, the level that separates positive and negative growth in activity.
The growing imbalance in the prospects of who will be the first to tighten policy - the ECB or the Bank of England ensures the dominance of sellers in EURGBP. From the technical point of view, we can single out the weekly range 0.842-0.846 in which the price has been fluctuating for a week. Considering that this is a continuation pattern, it is worth considering the test of the trend line at 0.8350 as a priority scenario:
At the same time, retail sales in the UK decreased by 1.3% in September (-0.4% forecast), however, due to the improvement in the service sector, consumers could increase the share of spending on services, which led to a decrease in the share of spending on retail sales, which somewhat softened impact from the weak print.
In turn, the dollar is gradually losing its main driver of recent strengthening - the Fed's hawkish position and higher real interest rates in the US compared to other countries. It is becoming clear that other central banks are also being forced to prepare markets for policy tightening in response to rising inflation. Technically speaking, the dollar’s retest of 93.50 this week opens up opportunities to short USD against EUR, GBP and JPY next week. The current descending channel and September support lines should be considered as the key price reference points for short positions:
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