GBP flows: Stronger CPI GBP supportive

Stronger than expected UK October CPI effectively rules out the chances of a December UK rate cut and has triggered a 20 pip decline in EUR/GBP to 0.8330. All CPI measures were above expectations, with core at 3.3% well above the 3.1% consensus while headline at 2.3% was also above the 2.2% consensus. However, most of the rise was due to a rise in electricity and gas prices, and services inflation was steady at 5.6%, albeit too high for comfort.

GBP is likely to hold and possibly extend gains slightly in the short term, having slipped back a little in recent sessions. A generally better risk tone is supportive as well, but it will still be a significant challenge for EUR/GBP to dip back below 0.83. While yield spreads point lower, the rise in UK yields since the Budget has failed to provide much of a boost to GBP, suggesting that the implications of the Budget for the UK economy and government debt profile are seen as justifying an increase in the risk premium attached to the pound.