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GBP/USD back below £1.30 for first time in almost 2 months: "This morning's inflation print had an immediate impact on Sterling"

Journalist: John Choong (Head of Markets and Research), Newspage

ended 16. October 2024

Markets immediately started to  price in more rate cuts as UK headline, core and services inflation all came in much lighter than expected Wednesday morning, with the Pound immediately weakening against the US Dollar and dropping below the 1.30 level for the first time in a couple of months. Newspage asked experts what their thoughts are on the outlook for GBP, inflation, and whether markets are being too optimistic to price in such a dovish Bank of England moving forward. Their views are below.

5 responses from the Newspage community

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Editor
David Belle
Founder and Trader at Fink Money
Inflation is definitely a key driver of this fall, but so is the temporarily dampened risk appetite of the past few days. Sterling is very risk-sensitive, and with this comes the ability for traders to dump it hard at any sign of fear that the pound could begin to produce lower yields. What's more, with inflation expectations between the UK and US deviating, this catalyses the GBP's downside even more, especially against the USD. However, there are some key levels above the $1.27 mark. FX traders will be watching for any news on a reversion, which could come in the next few weeks, and any upside surprises to inflation or GDP data could shift rate cut expectations and narrow the rate differential between the GBP and USD. In other words, if traders begin to price in more rate cuts in the US and fewer on this side of the pond, this would lean in favour of stronger GBP.
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Prem Raja
Head of Trading Floor at Currencies 4 You
This morning's inflation print had an immediate impact on Sterling. With headline CPI coming in comfortably below the Bank of England's 2% target for the first time in many years, Sterling immediately weakened against the US Dollar and dropped below the 1.30 level for the first time in a couple of months. The reason Sterling has weakened is that inflation at these levels shows that UK interest rates are higher than where they need to be currently and that Threadneedle Street has room to make further cuts down the road, almost certainly starting in November. Interest rate cuts generally devalue a currency and this is what we are seeing with Sterling. Generally, I expect inflation to pick back up over coming months due to rising energy prices again, and I think this current GBP move is short term and that we will see the Pound back above 1.30 again shortly as the UK economy is a lot stronger than is being portrayed.
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Editor
Tony Redondo
Founder at Cosmos Currency Exchange
This morning’s UK inflation data was more dovish than expected, with a headline figure of 1.7%, below the 1.9% consensus, driven by falling global oil prices. Core inflation dropped to 3.2% from 3.6%, also undershooting the 3.4% forecast, and services inflation fell significantly from 5.6% to 4.9%. This suggests a broader pullback in underlying price pressures, potentially paving the way for two more Bank of England (BoE) interest rate cuts in 2024, starting with the November 7 meeting. The BoE has indicated it wants service inflation to decrease before further cuts, which it got today.

However, this positive internal data may be challenged by external factors, including geopolitical risks, such as the situation in the Middle East, which could lead to rising oil prices. Additionally, upcoming US elections and persistent US inflation could indicate that market optimism about UK interest rate policy may be misplaced.
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Gabriel McKeown
Head of Macroeconomics at The Sad Rabbit Newsletter
Any remaining Bank of England hawks may have transformed into doves overnight, leaving sterling bracing for a turbulent flight through uncertain economic skies. The last few months have been overwhelmingly positive for the pound, with the positive momentum driven by diverging monetary policies of central banks, with the BoE holding firm while others being to ease. However, with consumer price inflation plummeting to 1.7%, exceeding market expectations, this will likely drive a weakening of the pound as the market's begins to reassess the BoE's likely policy path. The pound now faces considerable downside potential, with a 25-basis-point rate cut in November already priced in by markets, a further cut in December is now looking more likely. Additionally, with Chancellor Reeves "painful" budget on the horizon, the spectre of 2022's disastrous mini-budget looms large, with any unexpected policy announcements potentially sending shockwaves through the currency market.
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Darryl Dhoffer
Founder at The Mortgage Geezer
A resurgence in inflation or a less accommodative stance from the Bank of England (BoE) could lead to a weaker pound and a potential reversal of rate cut expectations. Additionally, any reduction in the base rate is likely to further depreciate the pound. While the BoE's decision will ultimately be based on economic data and policy considerations, factors like individual preferences or personal travel plans to Disneyland Florida, could influence monetary policy decisions, as a sceptic view.