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Falling food and fuel prices lead the decline; sterling slips against majors on rate cut hopes
Consumer inflation in the UK plunged by -0.2% in November, the lowest reading since July, after remaining unchanged the previous month, the UK Office for National Statistics (ONS) reported. Year-on-year CPI rose by a smaller 3.9% from October’s 4.6%. The lower-than-expected CPI print surprised economists who anticipated the annual headline inflation to increase by 4.3%, lifting expectations that the Bank of England would soon pivot toward lower interest rates, giving up its higher-for-longer narrative.
Meanwhile, core inflation, which omits food and energy prices, also declined for the fourth successive month to 5.1%, the least since January 2022, from 5.7% the month prior. Economists projected core CPI at 5.6% in November.
CPIH, OOH component, and CPI annual inflation rates
Source: www.ons.gov.uk
The sharp drop in the November CPI figures has led traders to ramp up bets that the Bank of England will slash interest rates by 145 basis points, close to six quarter-point cuts. Markets reacted to the positive inflation report, with the pound sliding against its major counterparts, while gilt yields fell, and the FTSE 100 jumped more than 1.5%.
According to the Chancellor of the Exchequer, Jeremy Hunt, inflation has more than halved, slowly eliminating inflationary pressures from the economy. He believes the tax cuts announced in autumn are driving the UK’s economy toward healthy, sustainable growth, and although households continue to struggle from the pressures of the high cost of living, he’s working on measures to help them.
Key highlights of the UK consumer price index report
The consumer price index, including owner occupiers’ housing costs (CPIH), slid to -0.1% in November from 0.4% the previous month. Over the past 12-months, the index rose by 4.2% but was below the 4.7% reported in October. Meanwhile, the headline inflation figure slipped to -0.2% on the month and rose 3.9% annually. The key sectors contributing to the decline in November included transportation, food and non-alcoholic beverages, and recreation and culture.
Excluding food, energy, alcohol, and tobacco, core CPIH slowed from 5.6% in October to 5.2% the previous month. The inflation rate of CPIH goods slowed from 2.9% to 2.0% annually, while those of services declined from 6.2% to 6.0%.
CPIH goods, services, and core annual inflation rates
Source: www.ons.gov.uk
The cost of transportation fell by 1.4% year-to-date in November after rising 0.5% in October, primarily from the downward effect of motor fuels, while a drop in the cost of second-hand cars and airfares also contributed to the decline. The prices of motor fuels fell by 10.6% YTD from 7.6% in the year to October, while airfares dropped 13.9% in the year to November and 3.3% over the past 12-months.
Meanwhile, prices of food and non-alcoholic beverages climbed 0.3% month-on-month in November and 9.2% annually. However, despite the high annual rate, prices have plunged from 45-year highs of 19.2% in March.
Contributions to change in the annual CPIH inflation rate in November
Source: www.ons.gov.uk
Economists’ review of the UK CPI report
According to Jake Finney, an economist at PWC, the headline, core, and services inflation have dropped below the UK central bank’s forecast in their November Monetary Policy Report. He believes it provides solid evidence of disinflationary pressure in the UK.
Market reaction to the UK consumer inflation report
UK stocks rose for the third straight day, with the benchmark FTSE 100 (UKX) ending Wednesday’s session at three-month highs of 7715.68, up by 1.02%. Some of the gainers include the Intertek Group Plc (ITRK), Segro Plc (SGRO), Barclays Plc (BARC), and Ocado Group Plc (OCDO).
In the spot forex markets, the pound traded lower against its key counterparts on Wednesday after the sharp drop in consumer inflation ratcheted expectations that the Bank of England would pivot to rate cuts earlier than expected, waning demand for UK’s currency. The GBPUSD traded around 1.2650 at noon Eastern time on Wednesday, down 0.6% for the day, the GBPEUR slid 0.3% to 1.1555, and the GBPJPY fell 0.5% to 182.10.
According to forex market analysts, although the sterling has fallen over the last few sessions, the drop in inflation is good for consumers, bolstering the UK economy and supporting the domestic currency over the medium term.
In the UK treasury markets, the yield on the benchmark 10-year gilt tumbled 13.3 basis points to 3.525%, the lowest since mid-April after Wednesday’s inflation data reinforced expectations of potential rate cuts by the Bank of England as early as March next year. Market participants are betting on a high probability of five rate cuts next year, with a 70% chance that the BoE might lower rates for the sixth time.
Technical View
iShares Core FTSE 100 UCITS ETF GBP Dist (ISF)-
The FTSE 100 settled at a three-month high of 7715.68 on Wednesday, up 1.02% for the session. The iShares Core FTSE 100 UCITS ETF GBP Dist (ISF) is the largest ETF that closely tracks the spot FTSE 100, and since you cannot trade on the spot index, you can execute your trades on ISF. It has a low expense ratio of 0.07% annually and is quoted in GBP.
ISF closed 1.13% higher at £751.7 on Wednesday, pulling back slightly after testing key trendline resistance at £755.40. A break and close above the resistance is highly bullish, with the gains likely to extend to £785.00. On the downside, the near-term support is at Tuesday’s close of £743.30, followed by £731.00.
Go long on the ETF if it closes above £755.00 or breaks £763.00, with a stop loss at £740.00, and exit as prices approach £783.00-£785.00. Ensure to trail your profits.
Long positions can also be initiated if the ETF slides to £733.00. Place a protective stop at £725.00 and exit at £754.00.
iShares Core FTSE 100 UCITS ETF GBP Dist (ISF) – Daily chart
Click the link to view the chart- TradingView — Track All Markets
GBPEUR
The pound sterling fell 0.37% against the euro to close at a nearly one-month low of £1.1548 on Wednesday. The UK currency has been drifting lower over the past few sessions after holding around the £1.1684 mark for several days earlier this month, with the losses likely to extend to the support zone at £1.1410-£1.1495. On the upside, the near-term resistance is at £1.1610, followed by £1.1684 and £1.1758.
Go long on the GBP at the support zone, with a stop loss at £1.1370 for a profit target of £1.1600. Long trades can also be initiated if the pair closes above £1.1610 or breaks £1.1640. Maintain a protective stop at £1.1570 for a profit target of £1.1750. Move your stop losses to the entry point once the pair hits £1.1680.
GBPEUR- Daily chart
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RussiaUS