Dovish pivot for sterling – ING

The Pound Sterling (GBP) is trading almost half a percent lower this morning after the September CPI report showed the closely-monitored services inflation falling more than expected from 5.6% to 4.9%, ING’s FX analyst Francesco Pesole notes.

Dovish data paves the way for rate cuts

“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December). We think that has incidentally opened the door for a period of underperformance by sterling. Market pricing for BoE easing is adjusting as we write but currently shows a 25bp priced in for November.”

“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November now that services inflation has fallen 5.0%.

“Ultimately, the chances of the BoE delivering a 50bp cut are probably low, but the greater flexibility of pricing to the dovish end in the Sonia curve – paired with some positioning ahead of the UK Budget and the US election – can result in GBP/USD trading well below 1.30. The euro’s softish momentum means EUR/GBP probably doesn’t look as appealing as Cable to play sterling’s weakened momentum, but a return above 0.840 now seems appropriate in the near term.”