Sterling softer after UK inflation data
It was more of the same really in FX markets yesterday with the price action limited enough once again and the dollar continuing to edge higher. UK inflation data for September released a short while ago came in softer than the market expected, hence sterling is a little weaker as a result. The pound has moved back above the £0.87 level against the euro, and has dipped to around $1.3325 against the dollar, around half a cent lower than yesterday morning. The euro has slipped a little further against the US currency, hovering just above $1.16 this morning.
UK bond yields are lower this morning as the market ramps up rate cut expectations following the inflation data – there’s a circa 70% chance of a 25bps cut by the end of this year now priced in – with 2-year yields down around 7bps and 10-year yields down about 5bps. US and German yields continued to nudge lower yesterday, this mostly at the long end of the curve with 10-year yields down another 2-3bps or so. It was fairly uneventful in equity markets. European stocks were largely flat on the day, while the main US indices were mixed, with the Dow gaining around half a percent, the S&P 500 broadly flat, and the Nasdaq ending marginally lower.
Headline inflation in the UK remained at 3.8% in September according to this morning’s CPI release, lower than the 4% expected by both the market and the Bank of England. Core inflation (excluding energy and food prices) came in at 3.5%, also lower than forecast (3.7%) and down from 3.6% in August, with services inflation remaining at 4.7% (versus 4.8% expected) and goods inflation edging down to 1.5% from 1.6% the previous month. Taken together with the recent labour market report, which showed unemployment higher than expected and wage growth lower than expected, this latest inflation data means the Bank of England MPC meeting in November will be especially interesting. While the market still sees a relatively small chance of a rate cut next month (about 30%), the outcome is now likely to be a very close call.
Looking to the day ahead, there is nothing else of note at all due in terms of economic data. On the central bank front, the President and Vice-President of the ECB are both due on the wires this morning.