Pound Sterling Indifferent as UK Inflation Dips

12/14/2022

2 minutes read

2022.12.14 06:06

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MarketPulse

There was good news on the UK inflation front, as the November data indicated a drop in inflation. fell to 10.7% y/y, down from 11.1% in October and below the consensus of 10.9%. eased to 6.3% y/y, down from 6.5% a month earlier, which was also the consensus. Even with the welcome drop in inflation, it remains in double digits and is more than five times the Bank of England’s target of 2%.

The is almost unchanged today, despite the drop in inflation. This is in sharp contrast to the reaction on Tuesday to the drop in US inflation, which fell to 7.3% and was softer than expected. The US dollar was about 1% lower against the majors, as once again, a soft inflation report raised hopes that the end of the Fed’s tightening cycle is not far off.

All eyes on Federal Reserve

The will announce the benchmark rate later today, after Tuesday’s dramatic report. Inflation fell to 7.1%, down from 7.7% and below the consensus of 7.3%. This hasn’t changed the pricing of an 80% likelihood that the Fed will deliver a 50-basis point hike.

The markets will be listening carefully to the tone of rate statement and follow-up remarks, hoping for clues about the next meeting in February. There is a strong chance that the Fed will hike by 25 bp in February and then end the current rate-hike cycle at a terminal rate of 4.75%, on the lower side of the 4.75% to 5.25% range that is considered most likely.

BoE rate decision next

The meets on Thursday and is expected to deliver a 50-basis point hike, raising the benchmark rate to 3.50%. This week’s employment and inflation numbers were within market expectations, and a stronger pound has also helped lower the need for a more aggressive 75-bp move. We could see some disagreement among MPC members in today’s vote, which could shed some light on where the BoE goes from here.

Thursday’s rate decision is the final one of the year, with the next meeting not until Feb. 2. The most likely scenarios are for a 25 or 50 points hike. There is speculation that the February meeting could mark the end of the current tightening cycle, but I am skeptical unless inflation has fallen dramatically by then.

GBP/USD Daily Chart.