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  • richard evans

Surprise drop in UK inflation sends GBP lower

Good morning

UK inflation very much surprised to the downside this morning, headline coming in at 6.7% vs 7.1% expected and Core CPI down to 6.2% against expected 6.8%. GBPUSD traded immediately lower to 1.2335 marking a new low since May 2023, it has worked its way back to 1.2355 but there are eyes on the 1.2310 area which is the lowest we have seen since early April 2023. Whether this weaker print is enough to push BoE to a ‘hold’ decision tomorrow is the big question. It may come as too little, too late to affect tomorrows announcement, but if they do raise rates it must surely be accompanied by a comment that we are at or almost at a peak.

GBP’s decline has pushed GBP crosses lower as well. With EURUSD still up near 1.0700, GBPEUR is now 1.1560, some 100 points lower than last weeks highs, now 1.1610 becomes a key pivot level for me having acted as both support and resistance in the past few days. GBP getting no support over suggestions UK could join EU as an associate member, along with other European countries not yet integrated. Elsewhere GBPAUD now 1.9110, this pair had been very near 2.0000 just about one month ago, that seems a long way away now.

Unlike the UK, Canadian inflation came out a little firmer than hoped yesterday despite the core MoM number coming in lower. CAD saw kneejerk strength with USDCAD initially trading down to 1.3380. I was right that such a reaction wouldn’t last long and USDCAD climbed through the afternoon but it remains short of my 1.3475 option level, now 1.3450. Still a little time to go.

PBoC left key rates unchanged as expected. USDCNY fixed yet again at an absurdly low level of 7.1732 against a reasonable 7.2950 or so. PBoCs Zou did say that players should look more to the basket of currencies against CNY rather than just USD, which is probably reasonable but for now China has to make do with US Dollar rate being the key.

In Japan, Kanda has said they are communicating with US over FX moves. This would perhaps raise the potential for intervention, but the market is shrugging off these latest comments with USDJPY knocking on the door of 148.00. Yellen acknowledged that it is normal to communicate with other countries over FX and act if necessary to smooth out volatility, rather than divert the course of any particular currency. Monetary tightening must be the key for Yen, we’ll be watching to see if BoJ move away from negative rates this year.

At midday we have the Turkish central bank rate announcement. Regular readers may remember that CBRT raised interest rates 7.5% to 25% at their last meeting in August and after Turkey announced inflation at almost 60% earlier this month there is a lot of speculation that rates will go up a further 500bps to 30% today. In August the rate rise led to short-term strength in TRY but all those gains have been wiped out, USDTRY now around 27.03 and EURTRY 28.88. Any similar gains in TRY today will likely be seen as a selling opportunity.

The long-awaited Fed rate announcement comes later this evening. It will be accompanied by the dot-plot’ which signals the views of Fed officials. It is widely thought Fed will keep rates on hold but make it clear we could see at least one further rate rise this year, the Feds battle against inflation is not over yet. This may be reflected in that dot-plot, which will also be closely watched for any sign of rate cut through 2024. Some 1% of rate cuts in 2024 had previously been implied, at some point I do feel rate cut expectations will be pushed further out to leave rates at high levels for longer.

How this translates into USD remains to be seen. If, as expected, rates are kept on hold this evening, the dot plot suggests another rate rise, Powell says there may be another rate rise, and the dot plot pushes back the idea of rate cuts, it will be difficult to do anything other than buy, or at least hold, USD. I’d imagine that only if the dot plot suggests no further rate rises in 2023 and still 1% of cuts through 2024 are we likely to see significant USD weakness.

England are due to be playing Ireland in the latest ODI series. How much of this gets played is far from certain, a quick look at the forecast suggests a wet, stormy and windy day ahead. Batten down the hatches.

- 12.00 CBRT rate announcement

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 23.45 NZ GDP

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