Sterling Surges Amid Strong UK Inflation Data
Sterling climbed above $1.27 at inter-bank (IB) against the US dollar and €1.20 at IB against the euro this morning, buoyed by unexpectedly high UK inflation figures. The data adds pressure on the Bank of England (BoE) to postpone further interest rate cuts until next year, enhancing the pound's yield appeal.
Annual headline CPI increased to 2.3% in October, surpassing the forecast of 2.2% and up from 1.7% in September. The rise was driven largely by higher housing and household services costs, particularly electricity and gas prices, following the 10% hike in the UK energy price cap for October. This marked the largest monthly inflation jump since October 2022. Core inflation also exceeded expectations at 3.3%, while services inflation edged back to 5%, consistent with BoE forecasts.
Despite cutting interest rates twice to 4.75%, the BoE is now expected to delay further reductions. A 25-basis-point cut initially anticipated in December is now projected for February, with markets pricing the next full cut for March. Investor expectations for cumulative easing through 2025 have been reduced, with 59 basis points now priced in, down from nearly 67 yesterday.
While stretched speculative bullish positions may pose downside risks to sterling, today's inflation report could fuel further short-term gains for the pound.
Geopolitical Tensions Spark Shift to Safe Havens
Renewed tensions between Russia and the US triggered volatility across financial markets yesterday, driving investors toward safe-haven assets. Treasury bonds, gold, the US dollar, Swiss franc, and Japanese yen all gained, while the Polish zloty suffered the steepest losses due to its geographical proximity to the conflict.
The resurgence of geopolitical risks followed updates to Russia’s nuclear doctrine and reports of a Ukrainian missile strike within Russian territory. Russia has warned that Ukraine's use of Western-supplied non-nuclear missiles against Russian targets could provoke a nuclear response, heightening fears of escalation.
Limited Upside for EUR/USD Amid Persistent Headwinds
Despite a brief reprieve from selling pressure, the euro lacks a strong foundation for a significant recovery against the US dollar. Weak economic conditions in the Eurozone, political uncertainties, trade tariff risks, and widening interest rate differentials continue to weigh on the currency, suggesting sustained weakness in the medium term.
Since Trump’s re-election, EUR/USD has declined over 3%, and the drop extends to over 6% since the end of September. The $1.05 level remains a critical psychological support, but further downside appears likely without clear policy actions from the new administration. Trade tariffs pose a significant risk for EUR/USD volatility, while widening rate divergence is expected to sustain downward pressure on the pair.
Although potential stimulus measures from China could lend support to the euro, current policy announcements have underwhelmed, leaving little room for optimism about a reversal in EUR/USD's downward trend.
