Pound Sterling Supported vs Euro, Dollar as UK Inflation Declines

January 15, 2025 - Written by David Woodsmith

STORY LINK Pound Sterling Supported vs Euro, Dollar as UK Inflation Declines

The Pound to Euro (GBP/EUR) and Pound to Dollar (GBP/USD) exchange rates are seen trading modestly higher on Wednesday, quoted at 1.18672 (+0.16%) and 1.22188 (+0.06%), respectively.

After choppy trading in immediate reaction to the latest UK inflation data, the Pound traded marginally stronger as more substantial expectations of a February Bank of England (BoE) rate cut were offset by relief over a decline in UK yields.

ING commented, “The pound would have normally tanked on the back of a soft inflation print but is instead flat. That is another testament to its current role as an emerging market currency, being more sensitive to long-term borrowing costs than the short-term central bank outlook.”

MUFG added, “For the pound, an increased chance of a rate cut would usually be pound negative, but given the selling of Gilts had begun to weigh on the pound, we see scope for the pound to respond positively over the short-term at least, to the weaker inflation data.”

US yields also edged lower, which helped underpin Pound sentiment.

The Pound to Dollar (GBP/USD) exchange rate briefly hit 1.2240 highs before settling around 1.2210.

The Pound to Euro (GBP/EUR) exchange rate spiked to 1.1880 before a retreat to 1.1845.

The UK inflation data overall has provided relief, but the latest US inflation data later in the day will also be very important for bond and currency markets.

Strong US data would tend to put the Pound under renewed pressure while a softer release would provide further relief.

Consensus forecasts are for a monthly increase of 0.4% with a core increase of 0.3%.

The headline year-on-year inflation rate edged lower to 2.5% from 2.6% and slightly below consensus forecasts of 2.6%.

The core rate declined more sharply to 3.2% from 3.5% and below expectations of 3.4%.

The largest downward contribution to the monthly change came from restaurants and hotels, while the largest upward contribution came from transport.

The goods inflation rate increased to 0.4% from 0.7%, while the services sector rate dipped to 4.4% from 5.0%, the lowest reading since March 2022.

The UK 10-year yield retreated to near 4.80% from 4.89%.

Ruth Gregory, deputy chief UK economist at Capital Economics, commented, “Underlying price pressures still appear a bit more favourable than we had thought. That strengthens the case for a 25bps interest rate cut in February and lends some support to our view that rates will fall further and faster than markets expect.”

According to ING; “We have been calling for the BoE to cut rates by 25bp in February and that reinforces our view.”

Financial markets are now pricing in a 74% chance of an interest rate cut in February from 62% before the data.

Matthew Ryan, head of market strategy at Ebury, expects a robust debate within the bank; “On the one side, the doves will argue that weak activity data and signs of a downtrend in inflation warrant immediate interest rate cuts. Yet, the hawks will argue that they need more confidence that inflation is returning to target, particularly given uncertainties surrounding the new fiscal plans and Trump’s tariffs.”

ING maintains a negative long-term Pound view; “looking a few months ahead, this CPI print points to BoE cuts that should allow sustained GBP depreciation.”

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TAGS: Pound Sterling Forecasts