Forex Today: Why is the British Pound struggling to gain from hot inflation data?

What is shaping markets on Wednesday, 21 October?

Trading remains subdued at midweek, with no major macroeconomic releases to provide direction. The British Pound has seen some volatility after the inflation figures, but has yet to establish a clear direction against its peers.

How Has Pound Sterling Performed This Week?

The British Pound's strongest performance this week was against the Japanese Yen. The table below sets out the percentage changes in the British Pound (GBP) against the major currencies listed.

	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 are displayed 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) in the corresponding cell.

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

Annual UK inflation accelerated from 3.1% in August to 3.5% in September, exceeding the market forecast of 3.4%, according to Consumer Price Index (CPI) data released by the UK's Office for National Statistics (ONS). Core CPI, which strips out volatile food and energy prices, increased by 2.8%, compared with the previous rise of 2.6%. The report also showed a 3.9% year-on-year increase in the Retail Price Index, in line with expectations. Tuesday's advance of about 0.5% took the pair above 1.3400 to its highest since mid-September, but GBP/USD is little changed around 1.3370 during Wednesday's European morning. EUR/GBP is slightly weaker on the day, trading below 0.8400, whereas GBP/JPY is broadly steady at 211.50.

Tuesday brought a lower close for the US Dollar (USD) Index as appetite for risk dominated financial markets after Wall Street opened on a bullish note. By early Wednesday, the USD Index is holding modest gains below 102.00, alongside increases of between 0.1% and 0.5% in US stock index futures. According to CNBC, 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 market close.

Indirect talks with the US are proceeding through intermediary countries, Iran's Foreign Minister Abbas Araghchi said. He added that Washington had accepted Iran's seven-day proposal but wanted several further conditions included, without revealing what those conditions were. Araghchi also reportedly demonstrated that the US could not be trusted during negotiations. Crude oil is edging up on Wednesday after Tuesday's volatile session, with a barrel of West Texas Intermediate (WTI) gaining about 1% on the day.

Why is Brent swinging as Middle East negotiation reports face challenges?

Headline-driven swings linked to Middle East negotiations dominated yesterday's oil trading, according to Deutsche Bank analysts. Describing Brent's move, they say it “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 was swiftly reversed as the account of events changed, Deutsche Bank adds. “Later, Brent crude started to climb again, as the story was discredited by a diplomat involved in negotiations.” Referring to Bloomberg's reporting, the analysts note 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 ground lost earlier.

USD/JPY remains range-bound near 158.00 during Wednesday's European morning. 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 and policy. Figures published earlier in the day showed that Japan's exports grew 16.7% year-on-year in September, while imports increased 18.9%. Both readings were below analysts' projections.

EUR/USD is trading within a relatively narrow band above 1.1200 on Wednesday, marking a third successive day of such movement. A speech by European Central Bank (ECB) President Christine Lagarde is due later in the day.

Gold is approaching $4,100 early on Wednesday as selling pressure persists following Tuesday's slightly lower close.

Inflation: Common Questions

How is inflation measured?

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline measure is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). By excluding volatile items such as food and fuel, whose prices can shift with geopolitical developments and seasonal influences, core inflation provides the measure on which economists concentrate. It is also the measure targeted by central banks, whose mandate is to maintain inflation at a manageable rate, typically around 2%.

What does the Consumer Price Index (CPI) track?

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

How does inflation affect foreign exchange markets?

A country's currency tends to appreciate when inflation is high and weaken when inflation is low, even though that relationship may appear counter-intuitive. To bring elevated inflation under control, the central bank will normally increase interest rates. Those higher rates draw more capital from global investors seeking an attractive return on their money.

Why does inflation affect Gold prices?

Historically, investors sought Gold during periods of high inflation because it retained its value. They still often buy it as a safe haven during severe market turmoil, but for the most part it no longer serves that inflation-related role. High inflation prompts central banks to raise interest rates in an effort to curb price pressures. For Gold, higher rates are unfavourable: 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.