GBP retreats after surprise drop in UK inflation – Commerzbank

The Pound Sterling (GBP) reversed its gains after UK inflation came in below expectations, leaving the market focused on the Bank of England’s (BoE) rate cut today and the potential for further easing in upcoming meetings, Commerzbank’s Head of FX and Commodity Research Thu Lan Nguyen notes.

BoE rate cut already priced in, market eyes next moves

“Yesterday, British inflation figures surprised on the downside across the board. As a result, the pound completely gave up its gains against the euro from the previous day, as the path to further interest rate cuts now seems to be paved. As we have already emphasized, an interest rate cut by the Bank of England today is already priced in. The big question is whether and how many further steps will follow in the next meetings.”

“After last Friday’s disappointing growth figures, the weaker inflation figures now alleviate the Bank of England’s dilemma of a weakening economy and inflation above target, at least to some extent. And that would actually be positive for the pound. Inflation had recently proven to be extremely stubborn, which is why the latest interest rate cuts, including today’s move, should be viewed with caution.”

“However, after yesterday’s data, it remains to be seen whether price pressure will actually ease sustainably. If this is not the case and the BoE continues to cut interest rates, this would be bad news for the British currency.”