The British sterling slipped today after weak inflation data backed up the Bank of England’s call for urgent stimulus to boost the UK economy.
As pressure mounts for the cable, the markets zoomed in on consumer price inflation (CPI) numbers, which were released at 0930 GMT.
The data fuelled suggestions that the central bank will have to lower interest rates this year, with several policymakers, including Bank of England governor Mark Carney, hinting at a rate cut unless there is a significant boost to the economy.
In early trading in London, the pound fell against a basket of currencies. GBP was flat against the USD at $1.3019, while slipping 0.2% to 85.65 pence per euro.
Money markets are now pricing in a full 25-basis-point rate cut for June, compared to November a day ago, with a 62% chance of a move in January.
January has seen three members of the Bank’s Monetary Policy Committe say they are likely to cut interest rates at the next meeting.
Saunders’ comments on the need for a more accommodative policy also comes just days after Carney said Britain’s economic growth had largely declined – cementing an overall need to make further cuts.
Saunders said borrowing costs should be cut because of weakness in Britain’s labour market and its broader economy.
“With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present,” he said.
Manuel Oliveri, currency strategist at Credit Agricole, also comments:
There is more room for easing expectations to rise should incoming data disappoint and that could keep short-term sterling downside risks intact.
According to a Reuters poll, year-on-year inflation is expected to hold at last month’s level of 1.5%.
Rate cut decisions were bolstered by weak UK growth and industrial production data earlier in the week.
Senior FX strategist at Nordea, Morten Lund, believes the data “could have a slight impact on the market pricing on the Bank of England, but I do think the growth picture is much more important. If we are to see any more comments from the Bank of England, that is what is the key for BoE cutting or not in January.”
If we get a miss of inflation of by perhaps 0.2 percentage points, perhaps we could see a clear reaction in the market, moving lower and yields moving lower,” he said.
As bulls fight to keep a multi-month uptrend alive, only time will tell how the cable will react. What’s clear is that currencies do tend to fall when expectations for a rate cut increase.
However, on the plus side, if upcoming PMI data, due January 24th, 27th and 28th,
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