UK Inflation Cools in October, Clearing the Path for December Cut
In the FX space, the GBP was in focus this morning, with the October CPI inflation data landing at 7:00 am GMT and largely came in line with consensus. YY headline inflation was 3.6%, easing from 3.8% in September, with YY core inflation at 3.4%, softening from 3.5%. The MM services print was lower than expected at 0.2%, albeit improved compared to the previous month’s 0.3% fall; the YY services release also defied market expectations at 4.5%, down from 4.7% previously.
Of note, you will recall that at the BoE’s latest rate decision, the forecasts suggested inflation had peaked; you may also have noted that today’s headline data is now in line with the central bank’s estimate.
In the immediate aftermath of today’s inflation release, we saw a sell-off in GBP, though the move was short-lived and really nothing to write home about. GILTs open at 8:00 am and will provide more information on BoE rate-cut expectations. We knew heading into the event that investors were broadly expecting the BoE to move forward and reduce the bank rate by 25 bps next month, to 3.75% from 4.00% (assigning around an 80% probability).
Ultimately, with economic growth stagnant, jobs data cooling, and inflation showing signs of easing, it is fair to say that this helps seal the deal for a rate cut next month. However, it is worth pencilling in that we have November’s inflation report out a day before the meeting, and, of course, the Autumn Budget will be released next week, which could muddy the waters for the BoE.
Most Fed Officials Maintain a Cautious Tone
Where are we with recent Fed speak? Along with Governor Stephen Miran, Governor Christopher Waller continues to advocate for lowering the Federal funds target rate next month. However, as I pointed out in yesterday’s post, the pendulum is clearly swinging toward caution, given the lack of official data and the elevated inflation that remains north of the Fed’s 2.0% target. In my opinion, in the absence of clear official data, a tentative stance is sensible, particularly for a Fed that has largely adopted a data-dependent, meeting-by-meeting approach.