• Headline UK CPI inflation held steady at 6.7% vs 6.6% eyed; BOE rate hike odds rise to 60% for a quarter-point increase by the Feb 1st meeting
• Fed’s Williams said interest rates will have to stay at restrictive levels “for some time” to bring inflation back down to the central bank’s 2% target.
• Fed’s Waller can wait and gather more data before deciding if more rate hikes are needed

The dollar is rising and US stocks are declining on soft earnings, rising rates, and as the risks grow for a potential widening of the Israel-Hamas conflict. Today’s round of earnings from Morgan Stanley, JB Hunt, and United Airlines told a story of a weakening economy that has rising costs drive a weakening profit outlook.  Investors are scrambling into safety, which clearly includes the dollar as the next quarter looks like it has a lot of turbulence for earnings. 

FX

Stubborn UK Inflation and the risk of more BOE tightening in 2024 was unable to stop the British pound’s slide. Rising motor fuel prices were a key driver for the hot UK inflation data, which means disinflation might struggle if crude disruptions start occurring. Geopolitical tensions will remain elevated and will lead to a softer growth outlook that will drive safe-haven flows towards the dollar.

GBP/USD Daily Chart:

The GBP/USD daily chart shows price action is trading below all three key SMAs.  The psychological 1.2000 level remains critical support and so far has capped the recent rally in the dollar.  If bearish momentum accelerates, further downside could target the 1.1825 region.  To the upside, the 1.2365 provides critical resistance.

US Data

The Housing Market is showing signs of stabilizing.  Housing starts rose in September as multi-family homes saw an increase of more than 17%.  New home construction rose from 1.269 million to 1.358 million and building permits dropped from 1.541 million to 1.473 million.

This should be a rough year ahead for the housing market as mortgage demand plunges as interest rates for the 30-year fixed rate mortgage approaches 8%. Home buyers will have to face high rates, elevated house prices, and low inventories.