The pound took a further tumble this morning after data was released showing UK inflation fell unexpectedly despite a surge in fuel prices. The Consumer Price Index rose 6.7% from a year ago in August, less than the 6.8% gain the previous month and an improvement on the predicted increase of 6.9%. In further good news, core inflation, which strips out food and fuel, fell to 6.2% from 6.9%. Sticky UK inflation has led the Bank of England to tighten rates significantly and today’s print comes just a day before the MPC policy meeting which now becomes a real conundrum for rate setters. Ahead of this morning’s print markets were pricing in a 0.25% rate hike tomorrow, but the odds of a pause have significantly increased, driven by lower gilt yields at the open. Markets priced a 90% chance of a rate hike yesterday – at the time of writing, those odds were scaled back to 70%, with traders focusing on the particularly subdued core inflation number this morning.
The pound dropped to its lowest level since May with GBPUSD falling to 1.2334 before recovering a touch, showing that traders were not positioned for the surprisingly soft data. 1.2315 remains considerable support in cable, with a breach of this level opening up a potential move to 1.22. To prevent a move to the downside, the pound needs to find fresh buying intertest to push cable to test the 1.2410 resistance level.
The FOMC conclude their two-day policy with a pause in interest rate already telegraphed to the market. A recent slow down in inflation suggests a pause for the second time this year, with markets currently pricing in a potentially final hike at the November meeting. Investors will pay close attention to the Fed’s updated forecasts and ‘dot-plot’ as the central bank gets close to ending their rate hiking cycle.