Lee Hardman, Currency Analyst at MUFG, suggests that the market’s focus will remain on inflation developments in the European trading session as the latest CPI reports from the UK and US for September are both expected to reveal building inflationary pressures.
“The UK CPI report may garner more market attention in light of the recent sharp decline in the pound which if sustained is expected to reinforce upside risks to inflation in the coming years. The inflationary impact from the rebound in the price of crude oil is expected to begin having more impact as well on lifting the annual rate of headline inflation in the coming months.
The pound is vulnerable to an upside inflation surprise today as the BoE have already signalled that they are willing to look through a temporary inflation overshoot and maintain loose policy to support economic growth. Real yields in the UK have already collapsed since the referendum eroding support for the pound. The recent sell off in the Gilt market in response to rising inflation expectations may offer more support from the pound but only if yields then settle at higher levels.”