“Stronger than expected UK CPI inflation data this morning has a modest impact on the short end of the curve. The move, however, has not been sufficient to distract attention from the pressure that has been exhibited on the longer end of the curve. This morning the inversion of the 2 to 10 year section of the curve has triggered the headlines that this is the first such move since the financial crisis. Since curve inversion is usually seen as a precursor to recession, it is no wonder that the money market continues to point to a BoE rate cut next year. That said, the UK government is flirting with the option of a no deal Brexit on October 31 this year. This would doubtless bring a further drop in the value of the pound and a ratcheting up of headline inflation in the UK. The BoE thus has a difficult path to tread in the next couple of years.”
“Or house view remains that Brexit is likely to be delayed beyond October. This is likely to bring a sigh of relief from investors and a modest reprieve for the pound. However, insofar as kicking the can down the road is not a solution, any GBP bounce is likely to be half-hearted. Our 3 month forecast is EUR/GBP 0.90. On a no deal Brexit we see EUR/GBP rising to parity. We do expect some recovery in the following months but the pace and extent of this will depend on how the country copes during the winter months.”
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