After an unexpected drop in inflation in the UK, the market reacted with a sharp decline in the GBPUSD pair. The British pound weakened as a result of lower readings, as investors now see a lower probability of a continuation of interest rate hikes by the Bank of England (BoE).
The macroeconomic data for the UK for August
- CPI:
- Annual: current 6.7% y/y; expected 7.0% y/y; previously 6.8% y/y
- Monthly: current 0.3% m/m; expected 0.7% m/m; previously -0.4% m/m
- CPI Core:
- Annual: current 6.2% y/y; expected 6.8% y/y; previously 6.9% y/y
- Monthly: current 0.1% m/m; expected 0.6% m/m; previously 0.3% m/m
The UK's Office for National Statistics (ONS) notes that the main reasons for the lower readings are a drop in food and accommodation prices, but we also observed a decrease in service inflation, which is another good news for the economy and the BoE, giving policymakers greater flexibility before tomorrow's decision.
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Create account Try a demo Download mobile app Download mobile appThe UK Chancellor of the Exchequer, Jeremy Hunt, stated that inflation remains very high, however, today's data show that the plan to combat inflation is working. Inflation never falls in a straight line, but it has now dropped by 40% compared to the peak value. According to Hunt, the most important thing now is to maintain a restrictive policy to bring inflation to the target.
Essentially, markets are pricing in one more interest rate hike by the BoE in this cycle. This was already the case before the CPI report, but the latest prices confirm it even more. If inflation in the UK continues to follow this trajectory, this week could be the last interest rate hike we see from the BoE in this cycle.
- The probability of the BoE pausing rates on Thursday has risen to 31% from 20% on Tuesday following the CPI inflation drop.
- The probability of the BoE raising interest rates above 5.5% has fallen to below 20% from about 42% on the Tuesday curve.
The market is realizing a lower likelihood of further interest rate hikes by the BoE. As a result, we see a significant retreat in the GBPUSD pair. Source: xStation 5
