Pound Stumbles as Inflation Drops: Will Interest Rates Follow?.

GBP: UK inflation fell to 1.7% year-on-year in September, triggering a selloff in the British Pound. Readers of Pound Sterling Live were already prepared for this move, having been warned of potential market reactions if inflation undershot expectations. And that’s exactly what happened. The Office for National Statistics (ONS) reported a figure well below the 1.9% consensus, driven by falling global oil prices. Even more telling, core inflation — the measure most important to the Bank of England — dropped to 3.2%, below the anticipated 3.4%. According to Viraj Patel, strategist at Vanda Research, the decline marks one of the weakest September results in core inflation in over 25 years. This significant reduction in price pressures paves the way for two potential Bank of England rate cuts in 2024.

The market has reacted accordingly: the Pound to Euro exchange rate slipped from 1.20 to 1.1969, and the Pound to Dollar dropped from 1.3072 to 1.3022. Particularly striking was the fall in services inflation — a major sticking point for the Bank of England — from 5.6% to 4.9%. This may embolden the BoE to cut rates more aggressively. Patel believes the latest inflation undershoot could lead to a 50 basis point rate cut in November, suggesting the Bank had been too cautious by holding rates steady in September. Capital Economics forecasts further pressure on the Pound, predicting a 4% drop against the Euro and a 1% dip against the Dollar by the end of 2025.

EUR: The Euro-Pound (EUR/GBP) pair surged to 0.8380 during Wednesday’s European session, buoyed by the UK inflation report. Lower-than-expected inflation raised market expectations for additional Bank of England rate cuts before the year ends. With inflation now well below the Bank’s 2% target and core inflation easing to 3.2%, investors see more cuts on the horizon. In contrast, the European Central Bank (ECB) awaits guidance from President Christine Lagarde on future rate decisions, with her comments scheduled for later today. With Eurozone inflation also slowing sharply in September, Lagarde’s tone may mirror the dovish sentiment from the UK.

USD: As the dollar continues its early October rebound, focus has shifted to GBP/USD, which dropped below 1.3100 last week. The soft UK inflation data has reinforced expectations for a November rate cut from the Bank of England, which had already been priced in at around 80%. Traders are now betting on around 105 basis points in cuts by June next year, equating to about four 25 basis point cuts over the next six policy meetings. The pressure on the Pound against the Dollar intensifies, with 1.3000 becoming a key support level. Should that level break, it could lead to further declines, with the 100-day moving average at 1.2951 being the next target for sellers.