The British pound experienced a significant decline after UK inflation data came in weaker than expected, encouraging investors to anticipate more aggressive interest-rate cuts from the Bank of England (BOE). Sterling fell 0.6% to $1.2990, marking its lowest level since August 20. The latest figures showed that consumer prices rose by just 1.7% in September compared to a year earlier, falling short of economists’ forecasts.
Traders Expect Multiple Rate Cuts Amid Weak Data
The inflation report has fueled speculation among traders that the BOE will implement consecutive rate cuts in its upcoming November and December meetings. Previously, only a single rate reduction was anticipated. This shift in sentiment saw the yield on 10-year UK government bonds, known as gilts, drop by six basis points to 4.10%, reflecting lowered expectations for future borrowing costs.
Sterling’s Year-to-Date Gains Erased
Sterling has weakened over 3% from its two-year peak reached in September, undoing part of a robust rally earlier this year. The currency’s rise had been driven by the belief that the BOE would cut rates more cautiously compared to other central banks. However, the softer inflation data has cast doubt on that outlook, suggesting that easing price pressures could diminish the pound’s appeal.
Analysts Predict a More Dovish BOE Approach
“The data is unequivocally dovish for the BOE and paves the way for rate cuts at the two remaining meetings this year,” said Francesco Pesole, a strategist at ING. He noted that this development has “opened the door for a period of underperformance by sterling,” indicating potential headwinds for the currency going forward.
Governor Bailey Signals Possible Aggressiveness in Policy
The narrative surrounding the BOE’s approach to rate cuts has shifted in recent weeks. For months, expectations centered on the UK central bank lagging behind its peers in reducing interest rates. However, BOE Governor Andrew Bailey recently suggested in an interview with the Guardian that the bank could take a “bit more aggressive” and “a bit more activist” stance on rate cuts, which contributed to the pound’s recent losses.
Potential for Further Rate Cut Decisions Ahead
The latest inflation report may provide policymakers with greater confidence that price pressures are being contained, allowing for a faster pace of rate reductions. This sentiment was echoed by Jordan Rochester, head of macro strategy in EMEA for Mizuho, who stated that the data is “likely to change the UK narrative.” He added that “there are more negative surprises to come,” suggesting that the outlook for the pound could remain uncertain as markets adjust to the evolving economic landscape.
Conclusion
The softer-than-expected inflation data has set the stage for a potential shift in the BOE’s monetary policy approach, with increased bets on aggressive rate cuts in the coming months. As traders recalibrate their expectations, the pound’s recent slump highlights the uncertainty surrounding the UK’s economic outlook. Moving forward, market participants will be closely monitoring the BOE’s actions and any further economic indicators to gauge the future direction of UK monetary policy and its impact on sterling.
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