ExchangeRates.org.uk – The Pound slumped in immediate reaction to lower-than-expected inflation data, but managed to pare losses early in the New York session, helped by gains in equities.
The Pound to Dollar () exchange rate posted sharp losses to an 8-week low just above 1.2980 before rallying to 1.3015.
The Pound to Euro () exchange rate also rebounded to 1.1960 from lows below 1.1950. ING expects further Pound losses and gains; “a return above 0.840 now seems appropriate in the near term.” (GBP/EUR below 1.19).
The rate dipped to 1.7% from 2.2% previously and below consensus forecasts of 1.9%. The e also declined to 3.2% from 3.6% and below market expectations of 3.4%. A 25 basis-point rate cut is fully priced in for November with close to an 80% chance of a further cut in December. Alternatively, the bank could sanction a large 50 basis-point cut in November.
Markets.com analyst Neil Wilson commented; “It’s left traders betting that not only is the Bank of England certain to cut rates next month but will also follow up with another in December. It also raises the chance, albeit slim, that the MPC goes for a jumbo cut in November in acknowledgement that they could and should have cut in September.”
According to MUFG; “Today’s softer inflation report and further evidence of slowing wage growth in yesterday’s labour market report support our forecast for the BoE to speed up the pace of rate cuts by the end of this year.” The bank expects rate cuts in November and December and added; “A faster pace of would help to reverse pound gains recorded so far this year by undermining its carry appeal.”
Paul Dales of Capital Economics expects a BoE cut in November and, on balance, no change in December. On a medium-term view he added; “But we still think rates will eventually fall to 3.00%, which is lower than the 3.50-3.75% priced into the market.” Markets were also monitoring fiscal policy closely. There were reports on Wednesday that Chancellor Reeves would announce fiscal tightening of £40bn in the late-October budget in an attempt to address a huge £100bn medium-term black hole.
According to MUFG; “While additional fiscal consolidation measures will be welcomed by the gilt market and help to ease upward pressure on yields especially at the long end of the curve, they will act as more of a dampener on the growth outlook in the UK. At the margin, it could give the BoE more leeway to lower rates as well.” There are very strong expectations that the ECB will cut interest rates again at Thursday’s meeting with the potential for another cut in December, but there may be a limit to Euro losses. According to ING; “With such strong conviction about this cut and future cuts, the risk of disappointment is high, and thus we maintain a bias towards higher front-end rates.”
This content was originally published on ExchangeRates.org.uk
