This morning, the UK reported services inflation was unchanged at 4.7% in June, against expectations for a deceleration to 4.5%, ING’s FX analyst Francesco Pesole notes.
Markets continue to price in two rate cuts by year-end
“Services inflation held steady, and actually, looking at some of the core services measures (which exclude different volatile/less relevant categories), most of these picked up a bit. Services CPI will probably bounce around these levels for the rest of the year, before coming dramatically lower next spring. A fair part of what’s driving services inflation right now is chunky price rises that came through in April, most of which are inherently backwards-looking or regulated.”
“These will drop out next year, which the Bank of England is well aware of. Still, this means the bar to cutting rates faster still feels fairly high – we expect cuts in August and November. But tomorrow’s jobs numbers are key; if we see another bad payroll figure, that would put a lot of pressure on the Bank to shift in a more dovish direction.”
“Sterling is trading modestly stronger after the release. The risks associated with tomorrow’s jobs numbers are probably preventing any larger hawkish repricing in the Sonia curve and, by extension, keeping GBP gains contained. Markets continue to price in two rate cuts by year-end, but the recent tendency has been to explore more dovish pricing. A soft jobs print tomorrow should send EUR/GBP back above 0.870.”
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