Sterling's Critical Week: Mapping the Path Through UK Inflation Data

Saturday, November 16, 2024 (Week 46)

UK focus on Wednesday's crucial inflation data release. This comprehensive analysis examines the fundamental drivers currently shaping Sterling's value and near-term outlook.

Market Themes and Narratives: Sterling's Post-Cut Recalibration

The dominant theme influencing the British pound stems from the November 7th Bank of England rate cut, which lowered the Bank Rate to 4.75%. According to Trading Economics data, this decision, backed by eight of nine MPC members, propelled Sterling to its largest weekly decline in 2024, falling 2% to $1.2616 by Friday's close. Markets have rapidly repriced expectations, with interbank futures now showing only three quarter-point cuts anticipated through 2025, down from five cuts expected last week.

The emerging theme centres on the UK bond market's response to Labour's planned £40 billion tax increase, scheduled for announcement November 30th. The 10-year gilt yield reached 4.47% on Friday, per interbank quotes, reflecting growing concerns about increased government borrowing requirements and potential inflationary pressures. This fiscal uncertainty has created additional headwinds for Sterling, particularly as traders assess the broader economic implications of the proposed measures.

Geopolitics: Trade Policy Shifts Create Uncertainty

The UK's role in global financial markets faces new challenges following the US presidential election outcome in Week 44. Bank of England data shows heightened volatility in Sterling crosses coinciding with speculation about potential US trade policy changes. This uncertainty particularly affects the UK's substantial financial services sector.

Most significantly, the Office for National Statistics reports UK-US trade volume reached £22.1 billion in September, highlighting the crucial relationship between these economies amid policy uncertainty. Recent geopolitical developments, including Middle East tensions and European political shifts, have further complicated the trading landscape for Sterling.

Central Bank and Monetary Policy: Quantitative Framework Shift

The Bank of England's November 7th decision marked a significant pivot in monetary policy, with the 25-basis-point cut to 4.75% representing only the second reduction in four years. Key policy elements include:

• 8/9 MPC members voted for the cut (exceeding the expected 7 votes)

• Inflation forecast revised to 2.5% for year-end 2024

• GDP growth projection adjusted to 0.75% peak impact from budget measures

• Services inflation at two-year low of 4.9%, though still elevated

The bank's forecasts now indicate inflation reaching 2.2% by 2026, suggesting room for continued policy normalisation while maintaining price stability.

Economic Indicators: Comprehensive Data Review

GDP (Q3 2024):

• Actual: 0.1% QoQ

• Expected: 0.2%

• Previous: 0.5%

• Impact: Bearish GBP

• Next release: January 2025

Manufacturing PMI (October 2024):

• Actual: 49.9

• Expected: 51.4

• Previous: 51.5

• Impact: Bearish GBP

• Next release: November 22, 2024

Inflation Rate (September 2024):

• Actual: 1.7% YoY

• Expected: 1.9%

• Previous: 2.2%

• Impact: Bearish GBP

• Next release: November 20, 2024

Unemployment Rate (Jul-Sep 2024):

• Actual: 4.3%

• Expected: 4.1%

• Previous: 4.0%

• Impact: Bearish GBP

• Next release: December 12, 2024

Inter-markets: Cross-Asset Analysis

FTSE 100:

• Current level: ~8,070 (three-month low)

• YTD change: +4.27%

• Key support: 8,000

• Key resistance: 8,200

• Sector performance: Financial stocks leading declines

UK Government Bonds:

• 10-year yield: ~4.46%

• Weekly change: +9 basis points

• YTD high: 4.51%

• Current spread vs. US 10-year: +17 bps

The Currency: Sterling Under Pressure

Upcoming Catalysts:

November 20: UK Inflation Data

• Bullish scenario: >2.2%

• Bearish scenario: <1.7%

November 30: UK Budget Announcement

• Watch for: Deficit projections, tax measures, gilt issuance plans

December 14: BoE Minutes

• Focus on: Forward guidance language, dissent details

Key Forecasts and Projections

UK Economic Forecasts (Trading Economics):

• GDP Growth: -3.00% of GDP (end of 2024), -2.70% (2025), -2.30% (2026)

• Inflation Rate: 2.60% (Q4 2024), 2.10% (2025), 2.00% (2026)

• Unemployment Rate: 4.20% (Q4 2024), 4.70% (2025), 4.50% (2026)

• Interest Rate: 4.50% (Q4 2024), 3.00% (2025)

Market Forecasts:

• FTSE 100: 8,183.37 points (end of Q4 2024), 7,952.04 (12-month forecast)

• GBP/USD: 1.28 (end of Q4 2024), 1.26 (12-month forecast)

• UK 10Y Bond Yield: 4.46% (end of Q4 2024), 4.31% (12-month forecast)

Upcoming Data Releases (Week of Nov 20-24):

• Inflation Rate YoY (Oct): Expected 2.20% (vs. 1.70% previous)

• Core Inflation Rate YoY (Oct): Expected 3.20% (vs. 3.00% previous)

• Retail Sales MoM (Oct): Expected -0.30% (vs. 0.30% previous)

• S&P Global Manufacturing PMI Flash (Nov): Expected 49.9 (vs. 49.9 previous)

• S&P Global Services PMI Flash (Nov): Expected 52.1 (vs. 52.0 previous)

Conclusion

• Sterling faces immediate resistance at 1.266, with Wednesday's inflation print critical for near-term direction

• Gilt yields above 4.47% suggest markets pricing in significant budget impact

• Technical indicators point to oversold conditions below 1.2600

Sources: Bank of England, Office for National Statistics, S&P Global, Trading Economics, Bloomberg