UBS On-Air: Paul Donovan Daily Audio 'Choppy markets, in choppy waters'
Lead — UK September consumer price inflation unexpectedly moderated, driven by general discounts in the food sector that may not fully reflect consumers' inflation experiences. Per the full note from UBS, while airfare and fuel prices added to inflation, food prices have shown signs of easing, with discounts no longer limited to loyalty card holders. This dynamic could have implications for market expectations regarding the Bank of England's monetary policy path, particularly as inflation perceptions linger. In the near term, market participants should remain vigilant for shifts in the UK inflation narrative as it unfolds amidst overarching uncertainties in cross-border trade and geopolitical tensions.
What the desk is arguing
The desk posits that the recent moderation in UK inflation, particularly in food prices, could temper aggressive monetary policy expectations from the Bank of England. This perspective is supported by UBS Chief Economist Paul Donovan's commentary on September's data, which showed a notable discrepancy between recorded food inflation and consumer experience due to loyalty discounts no longer being a factor in overall pricing dynamics.
This context is underscored by the inflation print coming in lower than anticipated, marking an important pivot that could influence traders' positions on GBP pairs. The recent commentary also points out that falling consumer price inflation, especially in food, signals potential shifts in consumer sentiment surrounding the cost of living, despite headlines suggesting persistent inflationary pressures.
Where it sits in our coverage
Given our consensus target for GBP/USD at 1.075, with a range indicative of current market conditions being 1.04 to 1.12, several key firms have aligned targets: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This analysis aligns with the view held by jpmorgan, which sees value in the pound given the signals from the recent inflation data. Conversely, bofa is more cautious, suggesting potential downside risk for GBP/USD.
How other firms see it
Firms like jpmorgan remain aligned with our outlook, emphasizing the importance of the recent inflation moderation in shaping near-term expectations for GBP price action. In contrast, bofa expresses a more bearish stance, pointing to the possibility of persistent inflationary pressures that could undermine GBP strength.
With inflationary trends and consumer data in focus, traders should monitor influences related to the Bank of England's policy trajectory, particularly around upcoming economic indicators and geopolitical developments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK inflation data for September surprised to the downside.
- 02General discounts in food prices are easing inflationary pressures.
- 03Market reactions may focus on trader sentiment around Bank of England policy changes.
- 04GBP positioning could see adjustments based on evolving economic data.
Market implications
Traders should watch GBP/USD closely, particularly as it approaches key psychological levels around 1.07. The upcoming economic data releases will be pivotal in shaping sentiment. A break above 1.075 could initiate further bullish positionings.
Risks to this view
Should inflation rates rebound unexpectedly or if the Bank of England signals a more hawkish posture in response to lingering inflation, this could undermine the current expectations and prompt a reassessment of GBP valuations. Additionally, geopolitical developments could swiftly alter market dynamics.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 22nd of October. UK September inflation data was more modest than had been expected.
Airfares added to inflation by not falling as much as they did this time last year. Food prices, however, have moderated. Cheese, apparently, has been a big factor here.
It seems that UK supermarkets have become a bit more general in their price-discounting policies, but this may not change consumers' perceptions of inflation all that much. For several months now, the inflation rate for food consumer price inflation has been rising faster than the British Retail Consortium's Food Shop Price Index. The former does not include price discounts applied for loyalty card holders.
The latter does. An overwhelming majority of UK households hold consumer loyalty cards, suggesting that the food price inflation that is experienced, while still quite high, has also been notably less than the recorded rate in the official data. If loyalty card discounts morph into general discounts, headline consumer price inflation is reduced, as per this month, but most consumers' price experience is not changed.
Yesterday's sharp sell-off in the gold market seems to have slowed down today. The move still leaves gold prices substantially higher than they were a few months ago, and of course several of the fundamental underpinnings remain in place. Several central banks see gold as a safer way of holding a dollar asset than holding a US Treasury.
US interest rates are likely to continue to fall. The US dollar is not expected to strengthen. The fear of missing out trade may not be so reliable a prop, however.
Economically, a move of this scale has relatively limited impact. There is, technically, a negative wealth effect for those people who have been holding gold, and that could be relevant for a country like India, where gold remains a very key store of wealth. But, for the most part, the allocation to gold is still too small, and the move in markets still too limited, for economists to be getting concerned about the consumption impact of these gyrations.
US President Trump has been creating some uncertainty about previously assumed meetings. The proposed meeting with Russian President Putin may not happen. This is something that markets have not been especially focused on.
But, while expressing optimism about being able to achieve a good trade deal with China early next month, Trump also conceded that a meeting with China's President Xi may not happen either. That is something markets would be more focused on. China's relative bargaining strength has been shown with Trump's desire to focus on rare earths and soybeans, exports from China and imports to China that are economically and politically important to the United States.
Sources & References
How we cover this story