Market News

By Greg Ritchie

(Bloomberg) -- The pound tumbled after softer-than-expected UK inflation data emboldened investors to bet on more aggressive interest-rate cuts from the Bank of England.

Sterling slid 0.6% to $1.2990, its lowest level since Aug. 20. Figures Wednesday showed consumer prices rose just 1.7% in September compared to a year earlier, less than forecast by economists.

Traders are now betting on back-to-back rate cuts at the BOE’s November and December decisions, having previously favored only one reduction. The yield on 10-year gilts tumbled six basis points to 4.10%.

Sterling has weakened over 3% from a two-year high touched in September against the greenback, paring a world-beating rally this year fueled by bets the BOE would cut rates more cautiously than peers. The latest data casts further doubt over that narrative as price pressures ease, denting the currency’s appeal.

“The data is unequivocally dovish for the BOE and paves the way for rate cuts at the two remaining meetings this year,” said Francesco Pesole, a strategist at ING. It has “opened the door for a period of underperformance by sterling.” 

For months, the expectation was that the UK central bank would trail peers in cutting interest rates. But Governor Andrew Bailey earlier this month told the Guardian newspaper the BOE could become a “bit more aggressive” and “a bit more activist” in its approach to cutting rates, spurring sharp losses in the currency.

The latest data may give rate-setters more confidence that price pressures are being contained, as they consider how quickly to reduce borrowing costs. 

The inflation report is “likely to change the UK narrative,” Jordan Rochester, head of macro strategy in EMEA for Mizuho, said. “There are more negative surprises to come.”

(Updates with moves, comments and context throughout.)