U.K. CPI Preview: British Pound at Risk as Markets Call Bank of England Bluff

The British pound may fall as U.K. inflation data bolsters speculators betting that the Bank of England will be forced to cut interest rates faster than the central bank is willing to admit

• The British pound jumped as the Bank of England resisted rate-cut speculation.
• Markets are calling the central bank’s bluff, angling for dovish capitulation.
• Soft U.K. CPI data may bolster traders’ conviction, pressuring the pound lower.

The British pound raced higher as the Bank of England (BOE) pushed back against markets betting that it will have to join central banks in the U.S. and the Eurozone and begin cutting interest rates next year.

The currency jumped to a three-month high as BOE officials argued that “restrictive” monetary policy is likely needed for an extended period. The officials went on to warn that “policy must be restrictive enough for sufficiently long,” adding that “indicators of inflation persistence remain elevated.” BOE Governor Andrew Bailey hoped aloud that the top of the rate hike cycle has been reached, but pointedly added that it is too early to speculate on cuts.

Perhaps most tellingly, the voting tally on the nine-member Monetary Policy Committee (MPC) that steers policy remained unchanged at 6-3, with a majority favoring inaction while three members continued to press for a rate hike. That seemed to suggest a dovish shift in the consensus is yet to materialize.

Markets to the Bank of England: “We don’t believe you.”

Investors are dubious. The implied policy path priced into the swaps market moved to a more hawkish setting in the immediate aftermath of the BOE meeting—explaining the pound’s surge—then swung sharply in the opposite direction. In fact, the one-year outlook puts rates even lower than they were pegged before the central bank weighed in.

As it stands, the first 25-basis-point (bps) cut is penciled in to appear no later than June. An earlier reduction in May carries a hefty probability of 73%. Four such cuts are on the menu for 2024, bringing the target interest rate down by a full 1%. The spotlight now turns to United Kingdom inflation data and how the markets might revise this view in its wake.

The headline consumer price index (CPI) measure of price growth is expected to have risen 4.3% year-on-year in November. That would be a climbdown from October’s 4.6% as well as the lowest reading since October 2021. Analysis from Citigroup warns U.K. data flow has been lagging forecasts recently, hinting a downside surprise risk.

British pound at risk if U.K. CPI data boosts rate cut bets

A look at the contributing factors keeping inflation above the BOE’s target 2% bolsters the case for continued cooldown. Food prices remain the single biggest factor. Leading data from the United Nations shows they’ve already shed 25% since peaking in March 2022. A transmission lag to CPI of about 7 months means disinflation here is set to continue.

The other key areas of uplift—recreation and hospitality—are firmly cyclical. Price growth here is likely to fizzle as the slowing economy cuts into discretionary spending. The latest round of purchasing manager index (PMI) data from S&P Global put the economy at near-standstill in December.

CPI data reiterating these themes anew may bolster the markets’ dovish conviction, underpinning bets on a “sooner and deeper” rate cut cycle and driving the British pound lower. Losses may be most pronounced against the Japanese yen, where the Bank of Japan triggered a kneejerk selloff this week, as expected.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

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