Sterling has dropped nearly 0.5% today after the latest UK inflation figures came in below expectations.
The data showed the headline CPI rate for September at 3.8% (vs forecasts for 4.0%) and the core rate at 3.5% (vs forecast for 3.7%). Although inflation remains well above the BoE’s 2% target, the downside surprise has increased market expectations for a rate cut in December (now around 70% priced in vs <50% yesterday), which has weighed on the Pound today. The upcoming Autumn Budget (26th Nov) could prove pivotal on this. Should Chancellor Reeves announce tax-heavy, growth-dampening measures, then this could prompt the Bank of England to cut rates pre-emptively to try and get ahead of a weakening economy.
We also had some further bad news on the state of Britain’s public finances yesterday. September’s borrowing figures showed the UK government borrowed £99.8 billion in the first half of the financial year, which, if we exclude the global pandemic, is the highest amount of credit drawn by the government in over three decades. Needless to say, this adds even further pressure on the Chancellor and markets will be hoping that Labour can present a credible plan to bring down Britain’s large-scale reliance on borrowing.
Elsewhere, the dollar has been well supported so far this week amid easing fears over the state of the US credit market. However, concerns surrounding the US-China trade talks and the ongoing federal closure could put a cap on the USD’s advance. President Trump suggested this week that his meeting with President Xi may not go ahead as planned. While this far from rules out the striking of an agreement, it has dampened hopes of a near-term breakthrough. The US government shutdown has continued and scepticism remains over how much longer this may last. Yesterday, the reported frontrunner for the next Fed Chair role, Kevin Hassett, suggested there will be a possible resolution by the end of this week. However, betting markets imply the shutdown could last for another few weeks!
As a result, the GBP/USD rate is trading around 1% down from last week’s high and currently sits at a 1-week low. The GBP/EUR is down 0.5% today and trades around the lowest levels since Friday. Markets will turn their attention to Friday’s US CPI report which is the first major US release in weeks. With data releases being severely limited due to the US shutdown, this report is likely to carry more weight than usual and could reframe expectations for both Fed policy and broader risk sentiment. Friday will also see the latest UK retail sales figures and PMIs from the UK/EU.
