The United Kingdom’s inflation picture has changed dramatically. According to new data released from July, inflation has dropped to its lowest rate in more than two years, reducing the chances of our economy falling into a spell of stagflation. As of September, the UK’s headline Consumer Price Index (CPI) stood at an annual rate of 3.8%. This figure was below both the consensus and the Bank of England’s own forecast of 4.0%. That’s the third month in a row of disinflationary progress, indicating continued signs of a cooling economy.
The inflationary relaxation has boosted market expectations for an eventual rate cut from the BoE, already showing oodles of strength after previous sterling-pump maintaining BoE cuts. Economists are pointing to the swaps market, which would imply an easing of 50 to 75 basis points over the next year. FOMC members foresee the policy rate bottoming out between 3.25% and 3.50%. The British pound (GBP) has tanked against all the majors. This drop reflects heightened speculation regarding an imminent cut in interest rates by the Bank of England (BoE).
“GBP dropped against all major currencies as cooler UK inflation raised Bank of England (BOE) rate cut bets.” – BBH FX analysts
Those figures followed an even more surprising drop in the UK core CPI to 3.5% YoY. This is a decent bit lower than the consensus prediction of 3.7%. The services CPI was unchanged at 4.7% y/y for the second straight month. Analysts were looking for it to climb up to 4.8%.
Consequently, as hopes for a near-term rate cut rise, the pressure on the GBP intensifies. Key support has formed near the 1.3250 area, which is in line with the October 14th low, and near the 1.3216 level matching the 200-day MA. The recent slide in the pound demonstrates the currency’s sensitivity to shifting fundamentals and developing economic narratives, along with shifting hawkish and dovish messages from the BoE.
The Bank of England’s next policy decision and Monetary Policy Report is due out on November 6. Expect to hear even more on the future path of monetary policy during this meeting.