Pound sterling declines on soft October inflation reading 

Pound sterling declined on Wednesday following data revealing that British inflation decelerated at its swiftest pace in over 30 years in October. The development reinforces the expectation that the Bank of England (BoE) will implement interest rate cuts by the middle of the next year. 

The Office for National Statistics (ONS) reported that the British consumer price index (CPI) exhibited a 4.6% increase in the 12 months leading up to October — a significant drop from September's 6.7% surge. This reading, which came in below the anticipated 4.8%, marked the lowest in two years and represented the most substantial decline in the annual rate since April 1992. 
 
Core inflation, which excludes volatile food and energy prices, rose less than expected, posting a 5.7% increase compared to September's 6.1%, and falling below estimates for a reading of 5.8%. 

Following the release, sterling saw a 0.3% decrease against the dollar, reaching $1.2463 by 1135 GMT, compared to $1.2487 shortly before the release. 

The euro saw a 0.1% increase against the pound, reaching 87.13 pence. 

UK inflation: Soft reading means BoE will likely cut rates in 2024, say analysts 

Richard Garland, chief investment strategist at Omnis Investments, said in a note to Reuters: 

"This is a large fall in the headline CPI, but was widely anticipated due to year-on-year effects and falling energy prices; nevertheless, it is good news which confirms the downward trend in inflation. It is likely to mean that the bank is in a good position to begin cutting rates in late 2024, but much depends on the strength of the labour market and the economy”. 

In his morning notes on Wednesday, Markets.com Chief Market Analyst Neil Wilson wrote that the latest inflation data from the U.S. and UK indicates that policymakers are now likely considering how long to keep interest rates at current levels, rather than raise them further: 

“But the inflation data this week does one thing for sure – the bar for further hikes is getting higher – so the question remains as it has for some weeks now – rather than how high, how long? Again, the question is: can they now declare victory over inflation? Has the paradigm not changed – was it in fact ‘transitory’? I suppose everything is transitory on a long enough timeline, and it’s taken the most aggressive hiking cycle in 40 years to get to this stage.    

How does this narrative change? All of a sudden: upside shock to inflation – this seems a possibility – the Fed has cautioned about head fakes. Slowly: inflation stays persistently around 4% but no big shocks. The market is going to struggle to take more hawkishness from the Fed unless the CPI really stalls at this still-too-high level for at least the next couple of months. The Fed will hope this is the immaculate disinflation but I think this is a bit premature”. 

In a note on Tuesday, investment bank Morgan Stanley forecast that UK policymakers will likely lower interest rates to 4.25% by the end of the next year — despite the BoE’s recent assurances of it being “too early” to cut rates. 

GBP forecast: Scotiabank says minor sterling losses should find support in low 1.24 zone 

In a GBP forecast issued on November 15, Shaun Osborne, Chief FX Strategist at Toronto-based Scotiabank, wrote that the overall trend for the British pound is looking “constructive”, with sterling’s recent minor losses likely to find support in the low 1.24 area:

“Cable is forming a short-term top/reversal signal (‘evening star’) on the intraday chart. Cable’s peak is developing right on the 200-DMA (1.2514) so price action merits some close attention.  

The broader trend in the pound continues to look constructive, however, with trend indicators aligned bullishly on the intraday and daily studies. Minor GBP losses should find support in the low 1.24 zone for now.” 

At the time of writing on Wednesday, the GBP to USD exchange rate traded around the $1.2428 level, with sterling having declined by close to 0.6% against the greenback. Despite the recent decline, the UK currency has gained 2.75% against the dollar year-to-date.