Talking Points:
- UK inflation eases to 0.9% in October from September’s +1.0%; forecast was rise to +1.1 (y/y).
- British Pound weakens against the Dollar for the second successive day.
- Leaked memo about the UK government’s lack of succinct Brexit plans has spooked Sterling.
UK inflation fell to +0.9% in October from September’s +1.0%, defying expectations of a climb to +1.1% (y/y) in the latest Consumer Price Index reading. In response, the British Pound eased back for the second day in a row as the figures kept alive the possibility of a UK rate cut that could weaken the currency further.
The official figures, which included a reduction in the so-called “core” rate of inflation to +1.2% from +1.5% rather than the +1.4% (y/y) predicted by economists, came despite the Pound’s depreciation since the Brexit vote. That had been expected to lift inflation. However, producer prices climbed by more than expected year-over-year, suggesting that Sterling weakness could yet lead to a climb in the inflation rate in the months to come.
In recent weeks, particularly at the November Bank of England rate decision in the form of the Quarterly Inflation Report, it appeared that the Monetary Policy Committee struck a cautiously hawkish tone due to the weak Sterling. However, while the BOE could still move UK interest rates in either direction, the inflation data tempers the nascent hawkish enthusiasm – an outcome that could lead to further Sterling falls in the near-term. However, the data also imply that fierce competition in the UK’s supermarkets is keeping consumer prices in check for the time being.
In part, as Senior Currency Strategist Christopher Vecchio discussed in the live event webinar this morning, the miss was not a total surprise, given a calendar quirk and the aggregation methodology that culminated in an amplified base effect for October. Accordingly, especially in context of the weaker British Pound, in the forthcoming months, we expect to see UK inflation return to the topside quickly.
Also on Tuesday, Bank of England Governor Mark Carney reiterated that he will not stay in post after 2019. Speaking to the UK House of Commons Treasury Committee, he also said that blaming monetary policy for inequality was a “massive blame-detection exercise”. His comments had little effect on the Pound.
Chart 1: GBP/USD Daily Chart (November 15, 2016)
At the time this report was written, GBP/USD was trading at $1.2405.
Read more: Europe Slowly Coming Back into Focus as Traders Balance Trump & Fed Hike
--- Written by Martin Essex, DailyFX Research
To contact Martin, email martin.essex@ig.com
