GBP/USD Outlook: Pound Slumps as Inflation Hits 41-Month Low Against US Dollar

October 17, 2024 - Written by David Woodsmith

STORY LINK GBP/USD Outlook: Pound Slumps as Inflation Hits 41-Month Low Against US Dollar

The Pound posted sharp losses after the notably lower-than-expected UK inflation data.

Markets priced in very close to a 100% chance of an interest rate cut at the November Bank of England (BoE) meeting.

The chances of two rate cuts by the end of 2024 is now seen at near 70% and speculation over a larger 50 basis-point move in November has also increased which undermined the UK currency.

According to Sanjay Raja, chief UK economist at Deutsche Bank Research; “The case for sequential rate cuts is rising.”

Reports of larger than expected fiscal tightening in the October budget also hampered the Pound as Chancellor Reeves stated that there is a £100bn medium-term fiscal black hole.

The Pound to Dollar (GBP/USD) exchange rate slumped to below the 1.3000 level with an 8-week low near 1.2980 before stabilising just below 1.3000 which will now be a significant resistance area.

According to ING; “the greater flexibility of pricing to the dovish end in the Sonia curve – paired with some positioning ahead of the UK Budget and the US election – can result in GBP/USD trading well below 1.30.”

The Pound to Euro (GBP/EUR) exchange rate also posted sharp losses to below 1.1950.

The headline inflation rate dipped sharply to 1.7% for September from 2.2% previously. This was below consensus forecasts of 1.9% and the lowest reading since April 2021.

The core inflation rate dipped to 3.2% from 3.6%, below market expectations of 3.4% and the lowest reading since October 2021.

According to ONS Chief Economist Grant Fitzner; “Lower airfares and petrol prices were the biggest driver for this month’s fall. These were partially offset by increases for food and non-alcoholic drinks, the first time that food price inflation has strengthened since early last year.”

The goods inflation rate fell further to -1.4% from -0.9% while the services-sector inflation rate declined to 4.9% from 5.6%, the lowest reading since May 2022.

There was also a further decline in producer prices as raw-material prices declined

Lindsay James, investment strategist at Quilter Investors commented; “With inflation falling below this level and the pace of wage growth slowing, the conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too.”

Headline inflation is likely to increase again in the short term due to higher energy prices.

According to ING, however, services-sector remains a key metric; “We’ve argued for some time that it can end the year around 4.5%, rather than the 5.3% forecasted by the Bank of England.”

It added; “If we’re right, then we think the Bank of England can pick up the pace of cuts beyond November. We expect a cut in December and at every meeting until rates reach 3.25% next summer.”

Matthew Ryan, head of market strategy at global financial services firm Ebury commented that the Pound; “could be in for some additional near-term downside, particularly should the Labour government also unveil broad-based tax hikes in the October budget.”

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TAGS: Pound Dollar Forecasts