UK inflation came out first thing this morning and landed exactly as expected. Headline figures showed a drop to 3.6 percent from 3.8 percent and core inflation also showed signs of falling to 3.4 percent. This is the first drop since May and a welcome sign that price pressures are starting to cool. Sterling barely moved on the release because the numbers matched expectations, as well as the fact that Food & Drink prices still rose to 4.9%. The Euro has moved slightly higher against the Pound.
For Sterling, today’s inflation drop reinforces expectations that the Bank of England will cut rates in December. Markets are now pricing in a seventy nine percent chance of a cut. This puts even more attention on next week’s Budget. Investors will want to see whether the Chancellor announces anything that could push inflation higher again. Rachel Reeves has said she will avoid tax or spending measures that add to price growth. Some economists believe earlier policies such as higher employer taxes and wage increases have already added around one percentage point to UK inflation which represents the biggest influence on Inflation. If she follows through this time, there is a chance inflation has now peaked, although prices are still rising and the Bank of England expects inflation to stay above its two percent target until at least Mid-2027.
The finer details behind today’s inflation number shows lower household electricity and heating costs have helped bring the figure down, along with cheaper hotel prices. Food inflation as mentioned earlier however, remains high at 4.9 percent and the Bank of England expects it to rise again next month.
Moving further into the morning, we have Eurozone inflation which is expected to remain at 2.1 percent. That would keep the European Central Bank close to target and should help the Euro remain steady which also reflects the markets movement earlier this morning.
Later today the United States releases the minutes from the Federal Reserve’s October meeting. Investors will be watching to see how close the Fed is to cutting rates in December. If the tone suggests slowing momentum in the United States economy, the Dollar could soften. A firmer tone would support it instead.
GBP/EUR 1.1317 GBP/USD 1.3101 GBP/AED 4.8141
GBP/AUD 2.0210 GBP/CHF 1.0504 GBP/CAD 1.8351
GBP/NZD 2.3279 EUR/USD 1.1560 GBP/ZAR 22.5187