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- GBP pressured to the downside for now – MUFG
GBP pressured to the downside for now – MUFG
GBP just lurched lower in response to the much weaker-than-expected inflation data from the UK. Economists at MUFG Bank analyze Sterling’s outlook.
Wages will need to show some big downside surprises to prompt a big dovish shift from the BoE
The sharp drop in the YoY headline CPI rate from 4.6% to 3.9% (expected at 4.3%) in November will be very welcomed by the BoE. The weakness looks broad-based as well with the core YoY rate 0.5ppt weaker than expected at 5.1%, down from 5.7%, helped by weaker services CPI which fell from 6.6% to 6.3% – the market expected it to remain unchanged.
The scale of the downside surprise in today’s CPI will likely prove telling, possibly not immediately, but as we proceed through Q1 next year. Before today, the OIS market implied the first rate cut would be in June. That is likely to be brought forward now and lower yields will keep GBP pressured to the downside for now.
The market view of divergence of the BoE relative to the Fed and the ECB has been undermined by this CPI report but wages will need to show some big downside surprises too to prompt a big dovish shift from the BoE.
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