Pound Sterling Falls against Euro & Dollar On Inflation Undershoot

The British Pound was softer across the board after UK inflation figures for October came in below analyst expectations and verified market expectations that the Bank of England would be in a position to cut interest rates by the middle part of 2024.

Headline CPI inflation plummeted from 6.7% year-on-year in September to 4.6% in October, said the ONS, undershooting the consensus expectation for a reading of 4.8%. Inflation flatlined at 0% month-on-month in October, which was markedly down on September’s 0.5% and just below expectation for 0.1%.

UK bond yields fell and, in turn, weighed on Sterling: the Pound to Euro exchange rate was seen lower at 1.1472 in the minutes after the release, the Pound to Dollar exchange rate was down 0.20% on the day at 1.2472.

“This is a market still being driven by relative rate narratives, and softer inflation may just bolster expectations for BoE easing in 2024 and pose a headwind to GBPUSD,” says Daragh Maher, Head of FX Strategy at HSBC (LON:HSBA).

A fall in household energy bills in October and the mechanical falling out of the previous October’s massive energy spike drove the sizeable fall in headline inflation, which was well anticipated by investors.

However, from a monetary policy point of view, the fall in core CPI inflation to 5.7% y/y in October (consensus: 5.8%) from 6.1% will be welcomed by the Bank of England. Core CPI rose just 0.3% in the month, which was below expectations for 0.4% and September’s 0.5%.

But the Bank of England will feel the job is still not done as the ONS confirms service-sector inflation remains buoyant, saying recreation and culture provided the only large positive contribution to this month’s figures, rising from 6.0% y/y to 6.4%.

“We’ve likely reached the peak of rising interest rates, and many are expecting the Bank of England to cut rates at some point next year. But with inflation set to fall slowly and the Bank of England being clear in their “higher for longer” message, businesses and consumers shouldn’t expect a significant reduction in rates anytime soon,” says Alpesh Paleja, Lead Economist at the CBI.