Market Overview: UK Salaries Are Being Scrutinized Ahead Of US CPI

The US markets, on the other hand, had a more positive day, closing higher and recouping some of the losses experienced last week, with gains fairly distributed across the board. Asia's markets have also risen as Hong Kong announced further relaxation of covid regulations.

With these gains, European markets are expected to begin modestly higher later this morning.

Bond rates rose somewhat, as did the US dollar, indicating some pre-CPI position shifting.

Despite a significant comeback in construction and services produced in October, which helped offset some of the September declines, yesterday's UK GDP figures indicated an economy facing several hurdles.

Nonetheless, the economy fell by -0.3% on a rolling three-month basis, with construction providing a glimmer of hope. In the near term, the UK labor market is also exhibiting amazing resilience; but, this might alter in the coming months, even as we look to a labor market where economic inactivity is at record highs, far over 20%, or over 2.5 million people.

The continued strike action may have a huge second-round impact in the New Year, especially in the hotel industry, where it might be the last straw for many struggling firms that depend on Christmas sales to get them through the slower months of January and February.

We may already be seeing the first signs of increased unemployment after it rose slightly in September to 3.6%, and although it remains near 48-year lows, it may rise again in October to 3.7%.

Wage growth, including bonuses, is predicted to rise to 6.1% in October, after being constant in September at 6%. Wages are predicted to grow to 5.9% without bonuses, up from 5.7%, barely keeping pace with core inflation.

If wages rise faster than projected, the Bank of England may feel forced to tighten policy somewhat more forcefully in addition to the 50bps rate increase already scheduled for this Thursday, but this is unlikely to be a majority decision.

It's also a crucial day for the peak inflation story, which has seen the US dollar fall from its highs earlier this year, as we await the latest US CPI figure for November. The US dollar's decline was exacerbated in the aftermath of the October CPI statistics, which came in considerably below estimates, however, this week's stronger-than-expected PPI numbers, together with the recent surprise surge in wage growth to 5.1%, have tempered some of that optimism.

Nonetheless, November's CPI is predicted to fall to 7.3% from 7.7%, while core prices are likely to fall to 6% from 6.3%. Any hint that inflation is proving stickier than predicted would likely spark a surge in rates and a comeback in the US currency.

It is crucial to note that whatever figures are released today, they are unlikely to change the arithmetic for a 50 basis point rate rise tomorrow. They will, however, provide crucial hints as to what the next year may hold. If inflation continues to fall, 25bps may become the base case scenario for January, while a higher amount is likely to become the base case scenario.

EUR/USD - is continuing to look for a peak close below 1.0600. A move over 1.0620 opens the door to a move toward 1.0800. Below 1.0400, the 1.0340 area and 200-day SMA are objectives.

GBP/USD - the air above 1.2300 remains a bit thin. Support is now located around the 200-day SMA at 1.2110. A coordinated advance through the highs at 1.2320 last week seeks the 1.2750 level. On a move below the 200-day SMA, a move below the 1.2040 level might lead to additional weakening into the 1.1985 area.

EUR/GBP - temporarily returned to 0.8620 yesterday, with short-term support slightly above the 200-day SMA and around the 0.8540 regions. Below 0.8530, 0.8480 is the objective. Above 0.8675, 0.8720 is the aim.

USD/JPY - finding support above the 200-day SMA around 135.00, with resistance at last week's highs just short of the 138.00 regions, retaining the bias to the negative. A break below the 200-day SMA re-targets the 133.60 lows.

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