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UK inflation surprises markets

The Pound loses 0.5% across the board..
Sterling has fallen this morning in what looks like a knee-jerk reaction to the latest UK inflation numbers. A sharper than forecast fall in inflation was welcome, but for us, the drop represents no need for change just yet from the BoE. Remember, a fall in inflation does not mean the prices of goods are going down, it means prices are rising more slowly. 

Markets were primed for a 10.3% reading (10.5% in December) but 10.1% was the result. Is it enough for money markets to price in a 25bp or no rate hike at all from the BoE next month? Yes is the answer from many this morning, which is why Sterling has weakened..

It is a notable drop, but the rate remains sticky in double-digits and miles away still from the 2% target. The reason some traders, analysts, economists and probably even some MPC members are getting excited, is the fall in the core inflation rate (this won't be easily found in the mainstream media news).

This best represents domestic inflation developments, as it strips out external variables such as energy and food. A result of 5.8% compared to a consensus of 6.2% (6.3% in December) is sizeable, and this is why GBP has lost ground. There shouldn't be much more £ value to lose this week and we expect to see a bump after the dust of today has settled.