The recent weakness in the British Pound (GBP) reflects continued sensitivity to bond market volatility, although calmer conditions may allow EUR/GBP to drift back below 0.870. – UK inflation data for December offered little new for the Bank of England, with core services steady at 4.0% and a modest rise in the headlines driven by food prices, notes Francesco Pisole, FX analyst at ING.
UK inflation data is unlikely to change the Bank of England’s forecasts
“Yesterday’s weak GBP performance, in our view, primarily reflected the risks of importing bond volatility into a currency that has recently seen periods of negative correlation with tailgating yields due to financial concerns. Quiet markets this morning mean that EUR/GBP could face some downside pressure and return below 0.870.”
“On the data side, there was nothing in the December UK inflation report – released this morning – that was likely to move the needle for the BoE’s February meeting. Our UK economist, James Smith, points out that the BoE’s preferred measure of ‘core services’, which excludes volatile and indexed items, came in at 4.0% for the third month in a row.
“The slightly more-than-expected acceleration of headline inflation to 3.4% is partly due to the acceleration in food prices to 4.5%. Food is something MPC members are watching closely, although it remains well below the Bank of England’s 5.3% forecast.”
