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Watershed moment for the UK's inflation story

Sterling v Euro hits a 6-week low..



We warned in our Monday report that the UK inflation release was a risk event and in our opinion it was a clear 'you have more to lose than to gain' scenario. A second consecutive 50bp rate hike from the BoE next month, has been priced into the Pound in recent weeks. This has been the reason for GBP's out-performance and multi-month highs across the board. 

However, that picture has now been changed due to the latest UK inflation report. Inflation is now at its lowest level for more than a year with notable decreases in transport prices, food and household goods. An 8.2% forecast was due to be lower than the previous 8.7%, but the result of 7.9% is a bullish one. The more important core number dropped from 7.1% to 6.9%.

As expected, the sharper fall in figures have devalued the Pound as it means the BoE do not need to hike by 50bp next month with inflation seemingly under more control than previous. £-€ has a resistance point at 1.15 mid-market with the £-$ showing a resistance point at 1.28 mid-market. These will likely both be pushed this week as traders close out their long positions on Sterling now that UK interest rates look to be no longer hiked aggressively. 

50bp is still on the cards next month though, so we aren't ruling that one out. Neither GBP strength after this week once the dust is settled. But for now we expect to see the Pound trade under pressure.