Sterling is dropping this morning after the release of the UK July inflation report, which showed below-expectation prints across the board. Headline CPI re-accelerated less than expected to 2.2%, but the biggest news was the larger drop in services inflation from 5.7% to 5.2% (consensus was 5.5%, Bank of England forecast 5.6%). Core inflation also decelerated meaningfully from 3.5% to 3.3%, ING’s FX strategist Francesco Pesole notes.
USD softness can still offer support
“Whether this changes the picture for the BoE is an open question. Remember that the BoE overlooked some volatile components like this one when they cut rates earlier this month, and a core services inflation measure (stripped out of those components) was actually unchanged in July. There is therefore a chance that the MPC may not put great emphasis on this downside surprise.”
“But until policymakers actually comment on this and perhaps tame any enthusiasm for larger easing, markets may be inclined to price in more cuts into the Sonia curve, also given the external pressure from the dovish repricing in Fed expectations.”
“All in all, this morning’s inflation figures still help our EUR/GBP bullish call, and we continue to see the pair as a preferable channel to play BoE-related GBP weakness as opposed to GBP/USD, where some USD softness can still offer support. A return above 0.860 in EUR/GBP looks warranted.”