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Pound sterling's recovery proved short-lived.
The pound to euro exchange rate (GBP/EUR) is back under pressure in midweek trade, with analysts pointing to soft inflation data for the move.
?The pair trades 0.20% lower on the day at 1.1326, having been as high as 1.1369 on Monday, suggesting a relief-style rebound having run out of impetus.
A catalyst for the midweek weakness is a slowdown in domestic inflation, with the ONS reporting prices rose 3.6% y/y in October, down from 3.8% in September. Softening in core inflation (where monthly prices rose at 0.3% m/m vs. 0.4% expected) adds to the sense inflation is coming off recent highs.
And that means one thing: the Bank of England can safely lower interest rates further without those cuts stoking inflation.
And a lower Bank Rate translates into lower short-term bond yields, which mechanically weighs on the pound.
Above: GBP/EUR is trending in a downside channel.
The government and Bank of England will be happy about the direction of travel:
? "Momentum in core inflation is close to pre-2022 averages. At 2.7% 3m/3m-annualised SA in October, this has been on a downward trend for five months, from a local peak of 4.2% in May," points out Jack Meaning, an economist at Barclays.
"Overall, today's data leaves our view of the likelihood of a Bank of England cut in December little changed," he adds.
Looking to next year, further rate reductions become possible as inflation should continue to ease, say economists.
A further softening in rate cut expectations should, on balance, keep pound-euro under pressure.
? "Looking ahead, inflation is likely to remain at similar levels over the final months of this year, but several factors should pull the headline rate down through next year,” says Edward Allenby, Senior Economist at Oxford Economics.
Above image courtesy of Berenberg.
The government can do something to help. There's talk about lowering energy bills through VAT cuts and green levy reductions.
Some economists suggest this could knock half a per cent off headline inflation next year.
Stinging tax hikes are meanwhile set to be announced next week, which should squeeze some excess out of the economy and also contribute to lower trends.
? The stronger pound relative to the dollar is also helping, says Allenby:
"The energy category starts to drag on inflation in H1 2026. We think food price inflation has probably passed its peak, with the impact of weaker food commodity prices and stronger sterling set to weigh on the category next year."
? Meanwhile, services inflation, the most stubborn component of the inflation basket, is expected to ease steadily due to cooling pay growth and strong base effects caused by this year's increase in national insurance contributions.
The market currently sees a rate cut in December and another cut in the first half of next year, taking the terminal rate to 3.5%.
? However, quicker progress on inflation can lower the floor, keeping pound exchange rates under pressure.