Sterling drops as UK inflation data signals BoE rate cut
Sterling was set for the biggest one-day drop as interest rate futures priced in a near 100% chance of a quarter-point rate cut from the BoE on Thursday
Sterling weakened on Wednesday after an unexpected drop in UK inflation all but guaranteed that the Bank of England would cut interest rates.
Sterling was set for the biggest one-day drop as interest rate futures priced in a near 100% chance of a quarter-point rate cut from the BoE on Thursday.
Data had shown that British inflation fell much more sharply than forecast in November to 3.2%, its lowest since March, from 3.6% in October.
Today’s CPI release removes any remaining doubt around a BoE cut in tomorrow’s meeting, said TS Lombard analyst Alexandros Xenofontos in an investor note. Taken alongside yesterday’s labour market data release, the data are sufficient for the MPC to cut tomorrow but not yet strong enough to justify more than one cut in 2026.
Sterling was down 0.34% to $1.33749, easing away from the two-month high it hit on Tuesday after data showed Britain’s unemployment rate hit its highest since the start of 2021.
For Sterling, we have noted that our view of relative underperformance is predicated on softer data, including on the inflation front, rather than a ‘dovish’ reaction function in itself. Today’s data goes in that direction and focus will now turn to the BoE meeting tomorrow, Goldman Sachs analysts led by Teresa Alves wrote in an investor note.
Markets are awaiting a host of central bank policy decisions due this week, including the BoE and European Central Bank on Thursday, as well as the Bank of Japan, which is expected to raise interest rates on Friday to a three-decade high.
Europe’s largest economy continues to struggle to grow, with a survey showing that German business morale unexpectedly fell in December.
The euro was flat at $1.174375, after hitting a 12-week high on Tuesday ahead of the ECB policy decision, where the central bank is expected to hold rates steady.