GBP: Slower UK inflation should ease pressure on gilts – ING

Finally, some good news for the gilt market. December’s UK inflation – released this morning – slowed more than expected. Services CPI, which is what the Bank of England is mostly focused on, came in at 4.4% versus the consensus of 4.8%. Core CPI slowed from 3.5% to 3.2% and headline from 2.6% to 2.5%, ING's FX analyst Francesco Pesole notes.

This CPI print points to BoE cuts

"We expect gilts to show some signs of relief once they open today. We have been calling for the BoE to cut rates by 25bp in February and that reinforces our view. Before the release, markets were pricing in 17bp for February, so we could see a dovish shift in the Sonia curve this morning."

"The Pound Sterling (GBP) would have normally tanked on the back of a soft inflation print but is instead flat. That is another testament to it currently acting like an emerging market currency, being more sensitive to long-term borrowing costs than the short-term central bank outlook."

"EUR/GBP had a good run yesterday, but largely on the back of strong euro performance. It is too early to turn optimistic on a sterling rebound, but some recovery in the UK bond market is a necessary condition for preventing new major FX sell-offs. Still, looking a few months ahead, this CPI print points to BoE cuts that should allow sustained GBP depreciation."