USD

The dollar strengthened against major currencies on Wednesday as inflation rose to its highest level since 1990 and fuelled fears it could prove stickier than the Federal Reserve expected.

The consumer price index rose 0.9% last month after gaining 0.4% in September, and in the twelve months through October, the consumer price index accelerated 6.2%. Food and gas were amongst those commodities consumers were paying a lot more than average.

The Fed last week restated its belief that the current inflation surge is transitory, but many investors fear that underestimating price increases could prove to be a costly policy mistake. The Fed also believes that prices will fall once supply bottlenecks start easing. However if inflation continues to be well above its target then this could force the Fed to act and raise interest rates sooner than expected.

GBP

The pound fell heavily on Wednesday after Brexit tensions and a stronger dollar weighed on the British currency.

Strong inflation data from the US caused the dollar to strengthen against the pound sending cable to its lowest level this month.

The EU also have issued fresh warnings to the UK in regards to implementing Article 16 of the Irish protocol. Fears of a trade war between the UK and EU continue to build after Ireland’s Deputy Prime Minister Leo Varadkar said his government was now preparing for such an eventuality.

Triggering Article 16 would allow the UK to suspend all, or part, of the treaty. But such a move would in effect undo the entire Brexit deal and precipitate a collapse in relations with the EU and Ireland. Varadkar went onto say if Britain were to act in this way by resigning away from the protocol then the EU would have no option but to place rebalancing measures. David Frost is set to meet EU counterparts this Friday which could be a pivotal day in deciding what happens next.

The pound will remain under pressure against the euro but markets still believe a rate hike will take place, which is keeping sterling supported against the euro.

Key announcements

7:00 – GBP – Preliminary GDP q/q – Actual -1.3% from previous 5.5%
7:00 – GBP – GDP m/m – Actual 0.6 from previous 0.2%