Sterling has weakened this morning after a surprise miss in the latest UK inflation report.
The CPI data showed that annual inflation dropped to a 3.5-year low of 1.7% last month versus expectations for 1.9%. Core inflation also eased to 3.2% (vs 3.4% estimate), which is the lowest level since September 2021. Not only should the data effectively guarantee another BoE rate cut in November (>90% priced in), but there is also now a heightened possibility that both the vote is unanimous and that the MPC strikes a more dovish tone in its communications. Market expectations are now around a 0.75% chance of back-to-back cuts in November and December.
Upon release of the data, the GBP/USD dropped nearly 0.75% and close to a 2-month low. The GBP/EUR fell just over 0.5% but continues to trade around buoyant levels. Next up, the market focus will shift to tomorrow’s European Central Bank interest rate meeting, US (Thurs) and UK (Fri) retail sales data, alongside a barrage of Fed policymaker speeches on Friday afternoon.
