GBP recovers from yesterday's knee-jerk inflation reaction

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waterman

Written by Dan Waterman
October 23rd 2025
The Pound recovers yesterday's losses thanks to the bond market..

Yesterday we explained how the UK's inflation data caused GBP to dip, even though the market driving UK bond yield fell. 

Clearly, yesterday's 0.2% devaluation of Sterling was a knee-jerk reaction and normal service has today resumed. The UK's bond yield has fallen again today, helping improve GBP's performance across the board.

We suggested that a better UK inflation outlook was actually positive overall for the Pound and this is because of stagflation concerns (high inflation, low economic growth) and government borrowing costs (bond market). 

BoE interest rate cut was always on the cards for Q4, so yesterday's Sterling sell-off made no sense to us, but thankfully it was just a knee-jerk and we move on.

Both £-€ & £-$ remain range-bound for the moment (meaning they are trading at consistent levels and are probably fairly priced), but tomorrow we could see some market volatility to prepare yourself for;

The US's inflation report is a 'biggie'
, as the Fed turn their attention from it to job preservation and interest rate cutting instead.

Before that, we have the ongoing EU v UK PMI battle, which saw a rare and unexpected victory for the former last time out. 

UK interest rate update

Barclays and other investment banks are expecting to see an interest rate cut next month, as opposed to December. Personally, I don't see it because of the UK Budget announcement later in the month on the 26th (BoE meet on the 6th), but something to be aware of.

Here's a conversation I had with myself whilst writing this today -

Has the market already priced in a 25bp cut in Q4? Possibly. Will a December rate cut help GBP rather than a November one? Possibly.

What will happen to Sterling after the UK Budget? No idea.

If you are worried about future exchanges, consider Hedging what you have in the pipeline to spread your risk or lock in a Forward Contract and save yourself the stress.