Pound slides as surprise inflation prompts selloff
Unexpected inflation figures lead to a pound decline as investors react, raising speculation about potential Bank of England rate cuts
The chances of the Bank of England leaning towards a more cautious stance in the upcoming interest rate vote have increased. This shift follows the release of UK inflation data on Wednesday, which was notably lower than anticipated.
In November, the UK Consumer Price Index (CPI) dropped to 3.9% on a yearly basis, marking its lowest level since September 2021. This figure fell short of the 4.4% forecast analysts had forecast.
The unexpected decline is expected to influence the voting decisions of key committee members. Hawks Megan Greene, Jonathan Haskel, and Catherine Mann, who previously supported a rate hike, are now likely to join the majority advocating for a rate hold on February 1.
Conversely, the most dovish MPC member, Swati Dhingra, may opt for a rate cut on the same date. Dhingra consistently opposed rate increases earlier in the year.
In response to the data, the pound weakened against both the euro and the dollar. EUR/GBP reached a three-week low at 0.8669, while GBP/USD dropped over 80 pips to 1.2659. Investors are adjusting their expectations, now anticipating the possibility of the Bank of England implementing interest rate cuts as early as March 2024, a departure from their previous outlook of further rate hikes.
