It’s going to be a busy week for pound traders, as the UK delivers its typical monthly avalanche of key data. On top of that, BOE Governor Andrew Bailey will be in Parliament, and his comments could provide additional volatility into sterling pairs. Markets will be looking to confirm their assessment that the BOE will hold pat on interest rates next month, while other central banks cut.
The Budget continues to capture headlines, which is also likely weighing on the currency outlook. Unlike other major currencies that have been battered when compared to the dollar, the pound has held up. That’s because markets are factoring in inflation staying higher in the UK, meaning the BOE will have to keep rates up even if the economy doesn’t do so well. But the data could change that perception right smartly.
Time For a Correction?
BOE Governor Bailey has been repeatedly saying since August that the markets are getting a little overeager about rate cuts. But the markets seemed to be correct when the BOE cut rates with a really strong majority of 8-to-1. Only the noted hawk Catherine Mann dissented in favor of keeping rates steady last time. However, the accompanying statement and commentary to the press managed to avoid saying there will be a rate cut at the next meeting, too.
The BOE has said that it expects inflation to rebound at the end of the year before settling down in early 2025. Presumably, at that point, the BOE will feel comfortable about easing. In the meantime, it would hold off on rate cuts. Unless, of course, The UK CPI data was slower than expected.
It’s the Economy!
Generally speaking, inflation correlates with economic activity. If the economy is growing, there is more monetary circulation, which translates into inflationary pressure. But, since the summer, the UK economy has started to, well, “stagger”. September’s monthly reading came in negative, potentially a sign that the rebound from last year’s technical recession is over. A slowing economy would incentivize the BOE to cut rates to support it, and provide lower inflation allowing that to happen.
The Budget is seen by the business community as applying more pressure to the economy, slowing it down. But the higher taxes and increased spending are expected to keep inflation higher. This means that the BOE will have to keep rates up, even if it hurts the economy, since its mandate is to keep prices stable. Though, time will tell how much of an impact the Budget will have.
What the Data Says
In the meantime, The UK CPI data is expected to pop back up above target as predicted. If it doesn’t, and shows a downward inclination, traders might start pricing in a rate cut from the BOE. That could finally get the pound to weaken after holding pretty steady for the last month or so.
The UK CPI data for October change is expected to come in at 2.2%, up from 1.7% prior, and above the 2.0% target for the BOE. However, that’s mostly expected to come from transitory things, particularly higher fuel prices. Already global crude prices are falling, which means the trend will likely reverse in the next month. What’s more concerning is that the core rate, which is more closely followed by the BOE, is expected to tick up to 3.3% from 3.2% prior.
