The British pound slipped across the G10 board on Wednesday after the latest inflation data showed CPI stuck at 3.8%, missing the forecast of 4.0%.
On the surface, inflation coming in slightly cooler might sound like good news, and it is for the consumer.
But the number confirmed that price pressures are fading, which means the Bank of England (BoE) now has more breathing room to pivot toward rate cuts in the months ahead.
And that’s exactly what hit GBP this week.
Bond Traders Are Already Moving
UK short-term yields are starting to roll over.
The 2-year gilt yield has dropped to 3.75%, its lowest level since May this is a sign that bond traders are now pricing in easier policy ahead.
When yields fall, it’s the market’s way of saying: “The next move is likely a cut.”
That’s a big shift from just a few weeks ago, when traders were still debating whether the BoE will cut at all.
Now, the conversation is about when cuts begin, not if.
Falling yields also make the pound less attractive to hold, especially against currencies backed by central banks that are still hawkish.
EUR/GBP the chart to watch?
We know the European Central Bank (ECB) is neutral right now and not looking to ease rates further.
If the Bank of England (BoE) decides now is the time to cut again, then EUR/GBP could breakout higher.
The price of EUR/GBP is trying to break through the resistance highs of 0.8750 with little luck so far.
However, if this situation remains then a breakout would be more likely considering the divergence between central bank expectations.
A break of this resistance could see EUR/GBP move towards the 2023 highs of 0.8900.
We have a Bank of England meeting on November 6th and that could decide the future of the GBP.