The Pound has come under a bit of pressure this morning and off its recent highs, following lower-than-expected UK inflation data (CPI). Year-on-year prices rose 3.9% versus and 4.3%, which is the lowest reading for over two years (Sept ’21). Although this will come as a welcome relief to households and businesses, it’s changed market expectations for how long UK interest will remain this elevated which has slightly reduced the appeal of the Pound today. Last week, the Bank of England stressed that it was still far too soon to even discuss the possibility of lower UK interest rates, which had lifted Sterling to its recent highs. So, although today’s data may bring forward these rate cut discussions, it’s likely BoE officials won’t be getting too carried away and one good inflation print shouldn’t be enough for the bank to drastically change in tune during upcoming communications. Core inflation still remains very high and well over double the MPC’s 2% target, while risks to further upside remain in place, most notably the continued sharp increases in annual wages. It may be likely that the BoE will hold the line for now, and continue to dampen expectations for imminent rate cuts, which might present some upside for sterling in the near-term.
In other news, some cautious comments on interest rates from Federal Reserve officials have failed to prevent the sell-off in the USD in the past few days. The dollar collapsed in the second half of last week, after the Fed issued a downward revision to its interest rate forecasts, while Fed chair Powell said discussions were already being had on the timing of US interest rate cuts. Since then, however, a handful of Fed members have attempted to calm market speculation, to little avail. The market had moved closer to expecting the first rate cut in March next year but many still don’t expect the first cut to come until around June 2024.
As a result, the GBP/USD is down around 1-cent today and towards the bottom of where it’s traded over the past 6-days (albeit still only around a cent off the highest levels since August). The GBP/EUR is down half a cent and now trades around a 3-week low. Next up, we have US and European consumer confidence figures this afternoon and then US GDP and PCE inflation data tomorrow.