UK inflation at 18-month high

Yesterday's currency recap

Yesterday afternoon, Canadian CPI came in lower than expected -1.7% vs 1.8% - opening the door for one more rate cut by the end of the year. As a result, GBPCAD rose by 0.35%.

Ahead of key data, due out towards the end of the week, trading across the rest of the G10 has been relatively flat. We're looking forward to the release of the UK, EU and US PMIs on Thursday and Fed Chair Powell's testimony at Jackson Hole on Friday.

Today's GBP rates

Key data points

What we think

GBP jumped after the July CPI overshot expectations, with headline inflation at 3.8% YoY (vs 3.7% expected) and services at 5.0% (vs 4.8% forecast). The beat keeps the Bank of England’s hawkish tone alive. Rate cut bets have been pared back, with markets now far less convinced of easing this year. Swaps had priced under a 50% chance of cuts pre-release, and today’s print tilts the balance further toward a “higher-for-longer” stance. However, GBP gains have been limited and haven’t pushed through recent highs, probably on account of the Bank projecting a September peak of CPI at 4%, as well as longer term concerns of stagflation in the economy. We expect gains to be capped towards the recent highs.

The FOMC minutes are today's highlight - if they reveal broad support for rate cuts, markets may revive easing bets to cause a weaker USD. Hawkish minutes and we expect USD to gain.

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