Inflation is falling, all around me

Market reports
Thanim Islam
  • UK inflation falls more than expected
  • Markets now price in 143 bps worth of cuts next year

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Last week's market themes resumed yesterday, with USD selling off on the back of Fed Barkin’s comments that should the recent progress on inflation continue then the Fed will likely cut rates – i.e. dovish comments. GBPUSD and EURUSD attempted to climb back up to the 4-month highs we saw last week. Year-on-year eurozone inflation numbers came in line with expectations, but the month on month figure did come in marginally lower than expected. It seems that ECB’s Kazaks hawkish comments earlier in the day supported the EUR.

Inflation in Canada is proving to be stickier that what markets were expecting – with the headline number coming in unchanged at 3.1%, versus an expected fall to 2.9%.

Big surprise this morning with UK inflation dropping far more than what markets had been expecting. The headline number is down to 3.9% from 4.6% and core down to 5.1% from 5.7%. The amount of interest rate cuts expected by the BoE by the end of 2024 has now increased from 122 bps to 143bps, 10 bps by March, and 30 bps by March. With more rate cuts priced in, GBP to no surprise is falling early doors.


Market rates

* Daily move - against G10 rates at 7:30am, 20.12.23

** Indicative rates - interbank rates at 7:30am, 20.12.23

Table - 2023-12-20T085726.492

Data points

Table - 2023-12-20T085728.021


  • EUR: ECB Lane
  • USD: Fed Goolsbee

Our thoughts

The weakness in this morning’s inflation will give members of the Bank of England the freedom to temper their hawkish tones, with the chances of a return to the 2% target now a real possibility. The differential in interest rate cut expectations between the UK and US has now reduced to almost 0 bps, yesterday the difference was only 35 bps. GBP seems likely to be on the backfoot now going into year-end.

Chart of the day

Today’s inflation number was the biggest downside shock since 2021, once again illustrating how wrong the analysts can get it. As inflation climbed since 2021, markets consistently underestimated how much inflation was rising by, and now it seems they are now overestimating inflation as it drops. Should we now see dovish comments from the BoE, then expect GBP to come under pressure.

20122023 cotd
Source: Bloomberg Finance L.P.

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