Forex Today: Hot inflation gives British Pound little support

Wednesday, 21 October: Key market developments

Markets are relatively subdued at midweek. With no major macroeconomic releases to provide direction, trading remains quiet. The British Pound has seen some volatility after the inflation figures but has yet to establish a clear direction against other currencies.

Pound Sterling Performance This Week

Weekly percentage moves in the British Pound (GBP) against the major currencies listed are set out below. Sterling recorded its strongest performance against the Japanese Yen.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.33%	-0.51%	0.05%	-0.42%	-0.87%	-0.38%	-0.09%
EUR	0.33%		-0.14%	0.43%	-0.03%	-0.47%	-0.03%	0.27%
GBP	0.51%	0.14%		0.57%	0.13%	-0.29%	0.12%	0.47%
JPY	-0.05%	-0.43%	-0.57%		-0.46%	-0.92%	-0.43%	-0.02%
CAD	0.42%	0.03%	-0.13%	0.46%		-0.46%	0.08%	0.38%
AUD	0.87%	0.47%	0.29%	0.92%	0.46%		0.42%	0.74%
NZD	0.38%	0.03%	-0.12%	0.43%	-0.08%	-0.42%		0.34%
CHF	0.09%	-0.27%	-0.47%	0.02%	-0.38%	-0.74%	-0.34%

Percentage movements between the major currencies appear in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the British Pound on the left and following that row across to the US Dollar gives the percentage change for GBP (base)/USD (quote).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

3.5% was the UK's annual inflation rate in September. The Office for National Statistics (ONS) reported that Consumer Price Index (CPI) inflation accelerated from 3.1% in August, exceeding the market forecast of 3.4%. Excluding volatile food and energy prices, core CPI increased by 2.8%, up from the previous rise of 2.6%. The report also put annual Retail Price Index growth at 3.9%, in line with expectations. Tuesday's advance of about 0.5% took GBP/USD above 1.3400 to its highest level since mid-September. By Wednesday morning in Europe, the pair is little changed near 1.3370. EUR/GBP is slightly down on the day, trading below 0.8400, whereas GBP/JPY is largely flat at 211.50.

Following a strong Wall Street open, risk appetite drove financial markets on Tuesday, leaving the US Dollar (USD) Index lower at the close. The index holds modest gains early Wednesday but remains under 102.00. US equity index futures are up between 0.1% and 0.5%. CNBC reported that SpaceX announced third-quarter revenue growth of 161% after the closing bell, supported by a ninefold expansion in its artificial intelligence business. Tesla's third-quarter earnings are due after Wednesday's closing bell.

Indirect talks with the US remain under way through intermediary countries, according to Iran's Foreign Minister Abbas Araghchi. He said Washington had accepted Iran's seven-day proposal while seeking several extra conditions, details of which he declined to reveal. Araghchi also reportedly demonstrated that the US cannot be trusted during negotiations. Crude oil is edging up on Wednesday after volatile trading on Tuesday, with a barrel of West Texas Intermediate (WTI) gaining about 1% on the day.

Brent reverses as Middle East negotiation reports face challenge

Middle East negotiation headlines drove yesterday's volatile oil trading, according to Deutsche Bank analysts. Describing the initial sell-off, they say Brent “dropped from around $112 to $106 in the early London afternoon after several unconfirmed reports indicated that Qatar and Pakistan had put forward a proposal that could potentially revive talks aimed at ending the conflict in the Middle East.”

That decline soon reversed as the account changed, Deutsche Bank says. “Later, Brent crude started to climb again, as the story was discredited by a diplomat involved in negotiations.” The analysts cite Bloomberg's report that “while talks to reach a deal are ongoing, reports that the negotiating sides were close to a solution were false,” which helped Brent recover much of the earlier loss.

USD/JPY remains rangebound around 158.00 on Wednesday morning in Europe. Speaking on Wednesday, Japanese Finance Minister (FM) Satsuki Katayama said the government was working closely with the Bank of Japan (BoJ), with no significant differences over the inflation outlook or policy. Japan's data released earlier in the day showed annual September growth of 16.7% in exports and 18.9% in imports. Both readings were below analysts' expectations.

EUR/USD is trading within a narrow band above 1.1200 on Wednesday, extending that pattern to a third consecutive day. A speech by European Central Bank (ECB) President Christine Lagarde is due later in the day.

Gold is approaching $4,100 early Wednesday. Pressure persists after Tuesday's marginally lower close.

Inflation: Key Questions

How is inflation defined?

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline rate is generally reported as a percentage change from the previous month, or month-on-month (MoM), and from a year earlier, or year-on-year (YoY). Food and fuel are among the more volatile components excluded from core inflation, as their prices can shift with geopolitical developments and seasonal factors. Economists focus on the core reading, which is also the measure targeted by central banks. Their mandate is to maintain inflation at a manageable rate, generally around 2%.

What does the Consumer Price Index (CPI) measure?

Changes over time in the prices of a basket of goods and services are tracked by the Consumer Price Index (CPI). The index is generally reported as a percentage movement month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI because it strips out volatile food and fuel components. A core CPI reading above 2% typically leads to higher interest rates; a reading below 2% usually has the reverse effect. Higher rates support a currency, so rising inflation generally strengthens it. Falling inflation tends to have the opposite effect.

How does inflation affect exchange rates?

A country's currency tends to appreciate when inflation is high and depreciate when it is low, despite how counter-intuitive that may appear. Central banks normally respond to higher inflation by increasing interest rates. Those higher rates draw in more international capital from investors seeking attractive returns on their money.

How do inflation changes affect Gold prices?

Historically, investors sought Gold during periods of high inflation because it retained its value. They still often buy the metal for its safe-haven qualities during severe market turmoil, but that pattern does not hold most of the time. High inflation prompts central banks to raise interest rates to contain it. For Gold, higher rates are a headwind: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. Conversely, lower inflation generally supports Gold by bringing interest rates down and making the precious metal a more attractive investment alternative.