GBP flows: GBP falls back on weaker CPI

UK CPI has come in well below expectations, spiking EUR/GBP higher by 30 pips, more than reversing yesterday’s decline after the UK labour market data. CPI was 0.2% below consensus in both headline and core. The largest downward contribution to the monthly change in both CPIH and CPI annual rates came from transport, with larger negative contributions from air fares and motor fuels. However, importantly the CPIH services annual rate fell from 5.9% to 5.6%.

A November rate cut from the BoE is now priced as a 90% chance, but there is still scope for the market to price in more substantial cuts further out. Even so, it is likely to be hard to break above the 0.84 level unless we see a turn towards weaker risk sentiment in general. GBP/USD should still find some good support near 1.30, as it has already fallen further than might be expected based on the moves in yield spreads.