Morning Brief – The crunch

Charles Porter
Thu 20 Jul 2023

The crunch

Was yesterday the crunch point for GBP that we will be referring back to for several months? Quite possibly, is the answer. Readers of the daily briefing and our clients will likely have shared conversations with our front desk of a forthcoming crunch point in Sterling markets. We have been suggesting that the Bank of England will be unwilling or even unable to deliver the kind of rate hikes the markets have been pricing for. When that realisation forces a correction in the Sterling fixed income market, GBP will necessarily pay the price. Whilst less emphatic a crunch as might have been delivered with a more impressive fall in inflation, yesterday’s data and trading session may still represent this inflection point. 

As we wrote to you yesterday, immediately after the data release, UK inflation came in at 7.9%. Core inflation was observed at 6.9%, versus 7.1% consensus forecast. The month-on-month figure was 0.4%, representing the smallest monthly price level increase since early 2022. Headline inflation is down nearly a full percentage point since May’s reading. As we discussed on Tuesday, the services component of inflation was to be watched closely by the Bank of England and the market. Falling by 0.2%, contrary to BoE forecasts for no change, will be received as an encouraging sign for the Bank and likely leveraged to excuse the need for any oversized hikes at their next meeting on 3rd August. 

Interest rate expectations have fallen by more than 0.5% since last week. The market now prices less than four 25-basis point hikes until the peak is reached. One data point is not sufficient to call time on inflation and as we highlighted yesterday, the fact 7.9% was welcomed as a figure is telling most of all of the scale of the inflation problem. So far, let’s say instead, the data has been sufficient to provide a significant correction and likely inflection point to what was a heavily overbought Pound Sterling heading into this week. 

Discussion and Analysis by Charles Porter

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