MUFG forecasts a potential decline in the British Pound (GBP) as upcoming UK Consumer Price Index (CPI) data for October is expected to show a marked slowdown in inflation. The report, which could reflect a decrease in headline inflation rates primarily due to lower energy prices, may influence the GBP's trajectory in the near term.
Projected Inflation Slowdown: The UK's headline inflation is anticipated to drop significantly in October, largely due to changes in energy price calculations and a possible decrease in food price inflation. This decline could position the UK's inflation rate closer to those of the Eurozone and the US.
Focus on Core and Services Inflation: The Bank of England (BoE) is likely to pay close attention to core and services inflation, where the easing of upward pressures is not as evident. Persistent high rates in these areas might maintain concerns over inflation.
GBP Vulnerability: Given the expected reduction in headline inflation and the BoE's focus on other inflation metrics, the GBP could face downward pressure. Market anticipation of further BoE rate cuts (approximately 55 basis points by December 2024) adds to this bearish outlook.
Data-Driven Movement: The GBP's movement in the coming week will depend on tangible signs of slowing inflation and a weakening labor market. The upcoming CPI data is therefore crucial in setting the direction for the currency.
MUFG's analysis suggests a cautious approach to the GBP, predicting potential weakness in response to the upcoming UK CPI report. While a decrease in headline inflation could align the UK's rates more closely with other major economies, concerns over core and services inflation and the market's expectations of BoE rate cuts could contribute to a softer GBP. Investors and traders should watch closely for the CPI data release and its implications for the UK's economic landscape and the GBP's subsequent performance.