Sterling lags as bond volatility fears resurface – ING

Pound Sterling’s (GBP) recent weakness reflects lingering sensitivity to bond-market volatility, though calmer conditions may allow EUR/GBP to drift back below 0.870. – December UK inflation data offered little new for the Bank of England, with core services steady at 4.0% and a modest headline uptick driven by food prices, ING’s FX analyst Francesco Pesole notes.

UK inflation data unlikely to shift BoE outlook

“Sterling’s underperformance yesterday was, in our view, primarily mirroring the risks of importing bond volatility for a currency that recently experienced periods of negative correlation with back-end yields on fiscal worries. Calmer markets this morning mean EUR/GBP may face some downward pressure and return below 0.870.”

“On the data side, there was nothing in the UK inflation report for December – released this morning – that is likely to move the needle for the February Bank of England meeting. Our UK economist, James Smith, notes that the BoE’s preferred gauge of ‘core services’, which excludes volatile and indexed items, came in at 4.0% for the third consecutive month.”

“Headline inflation accelerating slightly more than consensus to 3.4% was partly due to food prices accelerating to 4.5%. Food is something MPC members are monitoring closely, even though it remains well below the 5.3% BoE forecast.”