Yesterday’s inflation figures have put the Pound Sterling (GBP) under pressure, with services inflation coming in at 4.9% year-on-year, lower than expected. This has led to speculation that the Bank of England (BoE) may cut interest rates again in November. Commerzbank’s FX analyst Michael Pfister notes that the lower services inflation was largely due to a decrease in travel prices following a high August.
The market has gone one step further and priced in faster rate cuts until spring, in line with recent dovish comments from BoE Governor Andrew Bailey. Despite this, there is still potential for lower EUR/GBP levels, with stronger growth in the UK and relatively high inflation supporting this view. The BoE may continue to monitor inflation in the services sector, as price pressures remain high. Additionally, risks on the euro side are currently skewed to the downside, suggesting that the correction seen yesterday may be short-lived.
Looking ahead, the BoE is likely to take into account the lower services inflation when revising its forecast in the coming weeks. This could provide policymakers with the necessary room to implement faster rate cuts. Despite this, the UK’s stronger growth and persistent inflation may support the Pound Sterling in the long run. Additionally, the downside risks for the euro could further contribute to lower EUR/GBP levels in the future.
In conclusion, while yesterday’s inflation figures have put pressure on the GBP and raised expectations for further rate cuts, there is still potential for lower EUR/GBP levels in the near future. The UK’s stronger growth and high inflation may provide support for the Pound Sterling, while risks on the euro side remain skewed to the downside. Ultimately, the BoE’s decisions in the coming weeks will be crucial in determining the direction of the GBP and EUR/GBP exchange rates.
