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The pound is heading for its lowest level in nearly two months, while the US dollar is down 0.6% and is at 1.29957 at the peak of today’s declines.
The pound’s losses today come as UK inflation slows sharper than expected and is heading further below the Bank of England’s target, also with services inflation falling in September and wage growth slowing in August.
Services price inflation and wage growth are major concerns for the BoE, and if they go in the right direction, it could give the central bank more comfort to continue with its path of cutting interest rates or even speeding up the pace of cuts. This comes especially after Andrew Bailey spoke two weeks ago about the possibility of accelerating the pace of rate cuts. All of this may reinforce the possibility of the BoE cutting rates again in November.
In today’s figures, annual consumer price inflation slowed to 1.7% – the BoE’s target is 2%. On a monthly basis, prices were unchanged. Core inflation, which excludes energy and food prices, slowed faster than expected to 3.2% from 3.6% y/y and was up 0.1% m/m. Services price growth also slowed to 5.6% y/y from 5.9% and was flat m/m.
While producer prices, both input and output, contracted at a faster pace than expected in both the monthly and annual readings.
These figures add to the labour market figures we saw yesterday for August. Wage growth including bonuses slowed to 3.8% y/y in the three months ended in August. Unemployment also fell to 4%, as expected for the same period.
The pressure on the pound would have been more intense if Treasury yields hadn’t fallen, following an unexpected contraction in New York’s manufacturing activity in October, as indicated by the Empire State Manufacturing Index. This has strengthened the hypothesis of the Federal Reserve making two interest rate cuts in November and December, by 25 basis points at each meeting, to reach 94% and 86% respectively.
We have also witnessed a decline in fears about the escalation of the regional war in the Middle East, after The Washington Post report about Israel’s lack of intention to target Iranian oil or nuclear facilities now. This unprecedented escalation would have caused a huge spike in oil prices, with the potential disruption of supplies that could affect several countries in the region, which would have been a source of concern for central banks, as rising inflation in conjunction with lower interest rates would be the worst possible scenario.
In any case, I believe that refraining from a massive escalation of the war by Israel may be limited to the current round of attacks and the US election period. While we may witness an escalation of tensions with successive attacks and counterattacks in the next rounds of the conflict.
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