Sterling Update: Inflation slips below target for first time in over 3 years

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

Last Wednesday’s UK inflation report showed that inflation has slipped below the Bank of England’s 2% target for the first time in three and a half years. Core inflation also fell below the forecast 3.4% to 3.2%, while service inflation decreased from 5.6% to 4.9%. UK consumer price rises dropped to 1.7% in September, compared to 2.2% a year earlier, possibly contributing to retail sales volumes growing unexpectedly by 0.3% for a third consecutive month, marking the highest sales volume since July 2022.

In reaction to this positive news, markets are now fully pricing in a 25-basis point rate cut at the Bank of England’s next meeting on 7 November and forecast a 70% probability of a second cut in December.

On Tuesday this week, the BoE Governor Andrew Bailey will speak at the Bloomberg Global Regulatory Forum before taking part in a moderated discussion at the Annual Meetings of the International Monetary Fund and the World Bank Group on Wednesday. UK PMI data came out yesterday, with both Flash Manufacturing PMI and Flash Services PMI coming in below the expected readings of 51.5 and 52.3, respectively. Both figures showed continued industry expansion, with Manufacturing posting at 50.3 and Services at 51.8. The slight drop could contribute to the narrative of more aggressive rate cuts over the next few months.

EUR

Last week, the ECB cut rates for the third time this year by 25 basis points, bringing the deposit facility rate down to 3.25%.

Some policymakers, who anticipate inflation stabilising at the ECB’s 2% target earlier than expected, argued for dropping a long-standing pledge to keep borrowing costs’ sufficiently restrictive for as long as necessary’. But the President of the European Central Bank, Christine Lagarde, pointed towards greater downside risks than upside, and once again forecast inflation would “rise in the coming months, before declining to target in the course of next year.”

Market expectations are now for the European Central Bank to cut interest rates in all its next four meetings, suggesting that the deposit facility rate will be as low as 2% by July next year.

Lagarde spoke this week at Tuesday’s Annual Meetings of the International Monetary Fund and the World Bank Group and then about Europe’s financial challenges at the Atlantic Council on Wednesday. European PMIs also came out on Thursday morning. French Flash Manufacturing and Services PMIs both came in slightly below expectation at 44.5 and 48.3 and still linger below the key threshold of 50 that separates industry expansion and contraction. German Flash PMIs on the other hand both came in slightly ahead of forecast, with the Manufacturing reading landing at 42.6 and Services at 51.4. Overall, the Eurozone Flash Manufacturing PMI came in at 45.1, and the Eurozone Flash Services PMI was 51.2.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.