Pound Dips Following U.K. Inflation Data Report

British Pound Show Strength Against Major Currencies Amid Growing UK Retail Sales

The British pound weakened against other major currencies in the European session on Wednesday, after U.K. inflation fell below the 2% target and also hit the lowest in more than three years in September, piling pressure on the Bank of England to ease policy at the November meeting.

Data from the Office for National Statistics showed that consumer price inflation weakened more than expected to 1.7% in September from 2.2% in August. This was the lowest since April 2021. Prices were forecast to climb by 1.9%.

On a monthly basis, the consumer price index remained flat after rising 0.3% in the prior month. Economists had expected a 0.2% increase.

Core inflation excludes prices of energy, food, alcohol, and tobacco, softened to 3.2% from 3.6% in the previous month. The core rate also remained below the forecast of 3.4%.

Data showed that services inflation eased notably to 4.9% from 5.6%. At the same time, goods prices slid 1.4%.

The BoE had maintained its benchmark rate at 5.00% at the September meeting after lowering it by a quarter-point in August, which was the first reduction since 2020. The next policy announcement is due on November 7.

Another report from the ONS showed that output prices declined for the first time in eight months in September. Output prices dropped 0.7% annually, reversing a 0.3% rise in August. Economists had forecast prices to fall 0.6%.

Every month, the decline in output prices deepened to 0.5% from 0.3% in the prior month. Prices were expected to fall again by 0.3%.

Input prices decreased 2.3% every year, following a revised 1.0% fall in August. Monthly input prices were down 1.0% after a 0.3% drop in August. Input prices were expected to drop only by 0.5%.

European shares traded lower with weak earnings and caution ahead of a European Central Bank (ECB) policy meeting on Thursday denting investor sentiment.

The ECB is likely to deliver another interest rate cut after recent data signaled continued weakness in the eurozone economy.

In European trading now, the pound fell to nearly a 2-month low of 1.2982 against the U.S. dollar and a 6-day low of 193.70 against the yen, from early highs of 1.3078 and 195.30, respectively. If the pound extends its downtrend, it is likely to find support around 1.28 against the greenback and 191.00 against the yen.

Against the euro and the Swiss franc, the pound dropped to a 5-day low of 0.8380 and a 2-day low of 1.1193 from early highs of 0.8327 and 1.1280, respectively. The pound may test support near 0.84 against the euro and 1.11 against the franc.

Looking ahead, U.S. MBA mortgage approvals data, Canada housing starts for September, manufacturing sales data for August, and U.S. import and export prices for September, are slated for release in the New York session.

Conclusion

The sharp decline in U.K. inflation to 1.7%, its lowest in over three years, adds significant pressure on the Bank of England to further ease monetary policy at its upcoming November meeting. With inflation well below the central bank’s 2% target, and core inflation also falling, the case for cutting interest rates has strengthened.

The BoE, which already lowered rates in August, may be compelled to act again to stimulate the economy, especially as goods prices have turned deflationary, reflecting broader economic sluggishness. This marks a notable shift from earlier concerns about persistently high inflation and places the focus on supporting growth rather than curbing price rises.

The weakening British pound in response to this inflation data highlights the market’s expectations for more dovish central bank action. The pound’s fall against major currencies, including the dollar and yen, reflects concerns that further rate cuts could weigh on the currency in the near term.

However, if the BoE does opt for additional easing, it could provide short-term relief for borrowers and consumers. The broader European context, with weak earnings reports and expectations of an ECB rate cut, underscores the shared economic challenges facing the region, as both inflation and growth pressures continue to shape monetary policy decisions across Europe.

Article Source: RTTNews

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