UK Inflation Drop Hints at Rate Cut

UK Inflation runs cool
Risk assets quiet
Nikkei -0.45% Dax -0.07%
UST 10Y 1.79%
Oil $58.1/bbl
Gold $1552/oz
BTCUSD $8695

Europe and Asia:

GBP UK CPI 1.3% vs. 1.5%

North America:

USD PPI 8:30

Currency markets were quiet at the midweek point as traders awaited the official signing of the US-China deal later today during North American hours.

On the data front, UK releases took center stage with UK CPI printing cooler than expected at 1.3% vs. 1.5% eyed. The print was a three year low for inflation indicating that pricing power continues to erode. Services inflation fell to its lowest level since 2018 as discounting in hospitality and clothing sectors added to the downward pressure.

The news suggests that demand in the UK economy remains weak and the country may see GDP contract this quarter as the hangover from the Brexit saga takes hold.

The markets are now starting to price in the prospect of lower rates, though UK monetary authorities are keenly aware that options are very limited. With UK rates at 75 basis points, there is little scope for downside action before hitting ZIRP.

Still, if the economic news out of the UK continues to disappoint the pressure on the BOE will increase exponentially. For now, cable remains steady at the 1.3000 level but a few more shocks to the market could snap traders out of their complacency and push pound towards the 1.2700 figure as the quarter proceeds.

In the US today, the markets will see the signing of the phase 1 trade deal between the US and China, but the event is likely to be of ceremonial value only as the news is fully priced in. Indeed, the balance of risk is skewed to the downside if the tone of the ceremony remains combative, especially after yesterday’s announcement that the US tariffs will stay in place through the election. With risk assets off to a roaring start since the beginning of the year, today’s ceremony could be the perfect set up for some sell the news profit-taking.