UK inflation lurches to two-year high

The steady rise in consumer prices after the vote to leave the European Union continues to suggest that the weakness in the Sterling is playing a factor in higher inflation readings.

UK inflation exceeded estimates in November jumping to 1.2% which was the fastest pace in more than two years, propelled by prices in fuel and clothing. While a stable rise in inflation is typically caused by healthy economic growth, in this situation inflation in the UK has been fuelled by the Pound’s depreciation and rising oil which could be a cause for concern.

Although inflation continues to slowly edge towards the Bank of England’s golden 2% target, this most likely will not be enough to persuade the central bank to raise UK interest rates at its policy meeting on Thursday. With anxieties rising over the terrible combination of higher inflation and persistent Brexit uncertainties impacting the UK’s growth, the BoE could be placed under further pressure to take action in the New Year.

On the political side, comments from Chancellor Philip Hammond on how a transitional deal may be required to prevent a sudden “cliff edge” scenario installed Sterling bulls with inspiration on Monday as some hard Brexit fears faded. Regardless of the short-term gains, the Pound still remains firmly gripped by uncertainty which could cap any extreme moves to the upside. A strengthening Dollar from the reinforced expectations of a US rate hike could entice sellers to drag the GBPUSD lower in the medium term. From a technical standpoint, the GBPUSD may be in the process of a technical bounce with the 1.280 resistance acting as a strong foundation for sellers to attack.

Commodity spotlight – Gold

Gold edged lower on Tuesday with prices sinking back towards 10-month lows around $1156 as a stabilising Dollar and heightened speculations of a US rate hike on Wednesday encouraged investors to offload the commodity. This zero yielding metal remains fundamentally bearish amid the renewed rate hike expectations and any appreciations in prices could be seen as a technical bounce. From a technical perspective, there have been consistently lower lows and lower highs while both the daily 20 SMA and MACD have crossed to the downside on the daily timeframe. A decisive breakdown below $1150 could spark a further selloff towards $1140 in the coming weeks.

Index spotlight – Dollar Index
The fortified expectations of the Federal Reserve raising US rates on Wednesday have kept the Dollar Index buoyed with prices balancing above 100.50 as of writing. Dollar bulls remain in firm control as the mixture of repeatedly positive domestic data, hawkish comments from Fed officials and an overall improving confidence towards the US economy entices bullish investors to install heavy rounds of buying.

Although a rate hike has already been priced in, the actual interest rate hike could trigger further gains in the Dollar. Investors may also use Wednesday’s FOMC meeting to attain further clarity on rate hike timings for 2017 which if hawkish could provide enough encouragement for bulls to send the Dollar Index towards 102.00.