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UK inflation pushes for more BoE rate cuts

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By Craig Erlam  

The Bank of England may be much closer to cutting interest rates than it admitted last week, when three policymakers thought it still appropriate to hike again.

Inflation data from the U.K. Wednesday morning showed price growth cooled faster again and much more so than the BoE anticipated in November when it released its last forecasts. The headline CPI slipped back to 3.9%, while the core fell to 5.1%; both still far above target, but on a rapid descent toward it.

While disinflation is expected to slow, there’s a lot of evidence that it’s doing so to a much lesser extent than thought, which could demand a quicker and more forceful response from the central bank. And that’s exactly what markets have priced in.

Before the release, markets were eyeing around four 25 basis point rate cuts next year, which already looked aggressive compared with recent BoE commentary. But now it’s somewhere between 125 and 150 bps in total.

That’s much more aligned with the Federal Reserve and European Central Bank and suggests the UK isn’t as far behind its peers as thought.

The data took some more heat out of the currency on Wednesday, with the British pound trading lower against the dollar, euro, and yen, among others.

Retail sales on Friday will be interesting, as we see whether past hikes continue to weigh on consumer activity, which could ultimately push down services inflation further.

Oil bounces back

Oil prices continued to rebound Wednesday, with the risk of disruptions in the Red Sea potentially contributing to the recent jump. That said, the initial response was fairly mild, which suggests there are other factors at play.

Brent and WTI are recovering from similar lows seen earlier this year, which is quite the fall off from just a couple of months ago – 20% from peak to trough.

And with markets pricing in so many rate cuts now, that could boost the global economy next year and by extension demand.

Gold comfortably above $2,000

Gold has been in consolidation since last week’s Fed meeting, sitting comfortably above $2,000, but still short of all-time highs.

With so many rate cuts now priced in and yields so far from their recent peaks, gold bulls may be wondering how much further the price can go.

That will ultimately come down to the data and there’s still plenty more to come this week including inflation figures from the U.S. ​

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.