Today the financial markets are still digesting some of yesterday’s key fundamental data. Investors are chiefly preoccupied with the latest inflation rate update from the United States, which saw inflation climb to 6.2%, way above the 5.8% forecast. The CPI was also higher than expected.
The higher-than-anticipated growth in inflation is raising valid questions about the monetary policy of the Federal Reserve. Just last week at its meeting the Fed decided not to talk about rate hikes and not to promise any in the foreseeable future.
The spike in inflation suggests that the Fed may have to act sooner than it claims it would and hike rates before inflation gets out of control. This, in turn, has strengthened the US dollar.
Furthermore, the old issue of Brexit has resurfaced. As you might recall, the Brexit withdrawal agreement was a bit of a last-minute compromise, with Northern Ireland taking the brunt of it.
The country, which is part of the United Kingdom, desired a close, customs-free relationship with the Republic of Ireland, which is in the EU. The bloc was ready to agree to that, provided that the UK as a whole agreed to follow EU trade rules, which would have preserved the customs union.
But because the United Kingdom did not want to be subjected to EU regulation after Brexit, it refused the EU’s offer and Article 16 was instead worked into the agreement. It established a hard border between Northern Ireland and Great Britain, dividing the UK into two. Thus, England, Scotland, and Wales follow standard UK trade rules, while Northern Ireland adheres to EU regulations in order to trade freely with Ireland.
This has complicated trade within the United Kingdom and Boris Johnson’s government seems inclined to trigger Article 16 soon, violating the Brexit agreement. As a result, sentiment has worsened in the UK and the pound has weakened.
Speaking of the British economy, today the UK published GDP data for September, and a preliminary GDP report for the third quarter. All three reports failed to meet investors’ expectations.
Other notable data today was the latest unemployment rate and employment change reports from Australia, which were also a disappointment to market participants.
Later today we expect an updated bulletin from the European Central Bank, as well as its projections for the near future.
