GBP: Soft Services Inflation Diminishes BoE December Hike Prospects

GBP: Softer services inflation rules out BoE December surprise

The chances of a Bank of England surprise hike in December were already very low, but this morning’s UK inflation figures for October are further helping a dovish case. Headline inflation dropped from 6.7% to 4.6%, and core from 6.1% to 5.7%: a slightly faster deceleration than consensus in both rates.

We know the BoE primarily looks at services inflation, which noticeably undershot the Bank’s forecast (6.9%) by coming in at 6.6%. There are no other CPI releases before the next meeting, so along with the markets sticking to their view for a pause, there may be mounting speculation the BoE might soften its stance towards future policy direction.

As we write this report this morning, markets are close to pricing in a first rate cut in the UK in June (23bp). We keep pointing to the fact that pricing in the Sonia curve appears a bit too conservative compared to that of the US and the eurozone in pricing monetary easing and that raises the risk of GBP underperformance as the UK economic outlook deteriorates.

The combination of a tentative improvement in eurozone data and soft inflation figures in the UK should help build a floor around 0.8700 in EUR/GBP.