GBP/USD: Pound falls as rate cut bets rise

UK consumer price inflation unexpectedly tumbled to 3.9% in November from 4.2% the previous month, sharply undershooting forecasts of a 4.4% rise.

The surprise drop was driven by falling prices for food, beverages, transport, recreation, and culture, providing some pre-Christmas relief to struggling British households. However, core inflation excluding volatile energy and food prices held stubbornly high at 5.1%.

Sterling sank against both the euro and dollar on the data, with EUR/GBP dropping to 0.8669, a three-week low, while GBP/USD dropped over 80 pips to hit 1.2659. Investors are now betting the Bank of England could start cutting interest rates as early as March 2024 after previously pricing in further hikes.

The plunge in headline inflation could see Monetary Policy Committee doves Swati Dhingra and Silvana Tenreyro vote for an immediate rate cut to 3.25% at the next meeting on 1 February. Meanwhile, hawks Megan Greene, Jonathan Haskel and Catherine Mann could abandon calls for more tightening to join the majority in voting to keep rates on hold.

According to Nicholas Hyett, Investment Analyst at Wealth Club, “The fall in inflation has been driven largely by lower oil & gas and food prices, with core inflation still high at 5.1%. Until core inflation is back closer to target we suspect the Bank of England will remain cautious on interest rates.”