Sterling had a tough start to Wednesday’s session and lost ground against both the EUR and USD. After readings were released for core inflation and inflation rate in November. Expectations were that it would come down slightly from its figures in October, 5.7% (core inflation) and 4.6% (inflation rate). In reality we saw figures coming in a lot lower, 5.1% for core inflation and 3.9% for inflation rate. The markets view on inflation in the UK versus the US and Europe has been described as ‘sticky’ in recent months, we can know see that this is no more the case.
With inflation coming down naturally across a number of sectors, in particular in the service and food sector. What impact will this have going forward? Well last week’s comments from Bank of England of holding interest rates for longer will be forced to change. The current market probability on Bank of England cutting rates rose, suggesting it’s a 50% chance of first happening in March – if not, priced at 100% by May.
Recent GBP performance against the USD and EUR has been because of expectations that interest rates would be held for longer and be higher, creating foreign investment in the UK and therefor strengthen the GBP. The outlook is now completely different, with Bank of England put in the same category as the Federal Reserve and European Central Bank. Meaning all three Central Banks are expected to start cut interest rates in the first half of 2024 to lower borrowing costs and inject liquidity back into markets.