Synopsis:

MUFG observes that the latest UK inflation data, coming in weaker than expected, aligns with the soft inflation readings in the US, indicating a broader trend of easing price pressures. The significant drop in the UK headline inflation rate has reinforced market expectations that the Bank of England's (BoE) cycle of monetary tightening may be concluding.

Key Points:

• October CPI Data: The UK's Consumer Price Index (CPI) for October showed a weaker-than-anticipated increase, with a larger month-on-month decline compared to the US, due to the fall out of the previous year's utility price increase from the annual calculation.

• End of BoE Tightening Cycle: The data is likely to solidify the market's view that the BoE is close to ending its rate hikes, with potential implications for monetary policy and currency valuation.

• GBP and Risk Appetite: The pound sterling's (GBP) performance is somewhat tied to global risk appetite, which has been buoyed by the recent drop in global yields and the subsequent positive effect on equity markets, providing modest support for the GBP.

• Near-Term Outlook: Despite a softer dollar environment aiding GBP, MUFG maintains a cautious near-term outlook for the currency. The anticipated end to rate hikes and the impact of monetary policy on the real economy suggest a mild recession may be imminent, which could dampen GBP performance, particularly against currencies other than the USD.

Conclusion:

MUFG advises a cautious stance on the GBP, anticipating that the latest inflation data will reinforce the end of the BoE's rate hike cycle. The currency's near-term prospects are closely tied to global market sentiment, and while the current environment has provided some support, the underlying economic and policy backdrop may limit GBP's potential for outperformance.