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Sterling robust after UK inflation undershoots expectations

UK inflation now at its lowest level since September 2021..

The Pound has proven to be remarkably resilient so far today losing only 0.2% after the UK's February inflation result. Headline inflation has fallen from 4% to 3.4%, which was lower than the 3.5% forecast. The more important core inflation number fell from 5.1% to 4.5% and this too was lower than expected (4.6%).

It's surprising to see GBP so unmoved, especially as money markets are now pricing in firmly for a July interest rate cut in the UK. I expect this may change tomorrow after the BoE interest rate decision and following comments from the MPC.

There is a very real chance the BoE's target of 2% may be hit within 3-months and according to some economists it may not stop there. With energy prices due a huge drop off, we may see 1% inflation levels soon enough, which will make the BoE cut interest by far more than initially thought. 

We remain Sterling positive near-term, simply because both the EU & US should cut interest rates before the UK. But long-term, the Pound may struggle more than most expect, if the BoE cut interest rates to 3% instead of 4% next year..