GBP/USD Dips Below 1.30 Mark Amid UK CPI Data

The GBP/USD pair depreciated by 0.6% to 1.2990, marking its first close below the 1.30 level since August 19. This decline was primarily driven by the UK Consumer Price Index (CPI) data for September, which showed a year-on-year inflation rate of 1.7%. This figure falls below the official 2% target set by the UK government, leading to increased speculation about a potential rate cut by the Bank of England.

Key Points:

  • UK CPI inflation fell to 1.7% YoY in September.
  • Both the Bank of England and the US Federal Reserve are expected to cut rates by 25 bps to 4.75% on November 7.
  • The narrowing of the UK-US bond yield spread has weighed on the GBP, according to DBS’ FX analyst Philip Wee.

GBP Correction vs. Reversal

Despite the recent decline in the GBP/USD pair, analysts believe that this is more of a correction than a reversal of the trend. The narrowing of the UK-US bond yield spread, while initially negative for the GBP, could have positive implications in the medium term.

Medium-Term Outlook:

  • UK is making progress in returning inflation to the 2% target.
  • New Labour government’s focus on fiscal stability contrasts with US debt concerns.

Looking Ahead: UK Fiscal Policy

Investors are advised to pay attention to the UK 2024 autumn Budget announcement on October 30. UK Chancellor of the Exchequer Rachel Reeves aims to balance public spending with progressive taxation, which could boost investor confidence in the UK’s economic management.

Potential Impact:

  • Clear and sensible fiscal discipline could support the GBP in the long run.
  • UK’s economic growth expected to improve in 2025 compared to the US.

Overall, while short-term market movements may be driven by interest rate differentials, the focus on long-term fiscal stability and economic management in the UK could lead to a rebound in the GBP/USD pair.

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