Yesterday's inflation figures put the Pound Sterling (GBP) under considerable pressure: at 4.9% year-on-year, services inflation was even lower than expected, it got it yesterday, Commerzbank’s FX analyst Michael Pfister notes.

Potential for lower EUR/GBP levels

“This was largely due to an offset of the high August for travel prices. The headline rate was also lower than expected, due not only to lower services inflation but also to lower price pressures at the pump. In short, if the Bank of England (BoE) needed one last sign to cut interest rates again in early November.”

“However, the market went one step further and priced in faster rate cuts until spring. This is understandable as the figures were in line with recent dovish comments from BoE Governor Andrew Bailey, who spoke of a faster pace of rate cuts. At the same time, services inflation was well below the BoE's forecast, which should give policymakers room to underpin faster rate cuts when the forecast is revised in a few weeks' time.”

“Despite the figures, we still see potential for lower EUR/GBP levels. Stronger growth in the UK and still somewhat too high inflation support this view. Despite yesterday's figures, the BoE is likely to keep an eye on inflation in the services sector, as price pressures are still too high. At the same time, the risks on the euro side are currently skewed to the downside. Therefore, we can imagine that yesterday's correction will not last too long.”