British Pound Dips as UK Inflation Slides

UK inflation falls to 4.6%.
US inflation eases to 3.2%.

The British pound is lower on Wednesday. In the European session, GBP/USD is trading at 1.2459, down 0.31%.

UK Inflation Drops More Than Expected

UK inflation was expected to fall sharply in October and inflation duly fell to 4.6% y/y, compared to 6.7% in September and below the market consensus of 4.8%. Monthly, inflation was flat, down from 0.5% and below the market consensus of 0.1%.

Core inflation dropped from 6.1% to 5.7% in October, just below the market consensus of 5.8%. Monthly, the core rate fell to 0.3%, down from 0.5% in September and below the market consensus of 0.4%.

The Bank of England will be encouraged by the inflation print which shows headline inflation at a two-year low. Inflation is finally below the 5% level, a milestone of sorts as it has more than halved from a peak of 11.1% in October 2022. However, the BoE has been stressing that the battle against inflation is far from over, and has projected that inflation won’t fall to the 2% target until late 2025.

Governor Bailey said earlier this month that it’s much too early to talk about rate cuts, but the markets have priced in a rate cut as early as June. The BoE may be finished raising rates but it will likely want to hold rates for at least a few months before testing the waters with a rate cut.

US inflation was softer than expected in October, and the US dollar beat a hasty retreat, with sharp losses against the major currencies. The British pound surged 1.78% on Tuesday and touched a two-month high. The markets have repriced the rate odds at the December meeting, with the probability of a pause at 99%.