It’s a busy week of UK data, with the labour market figures, inflation and retail sales numbers all setting the scene for the Bank of England’s 7th November meeting. As a note, that is the same day as the FOMC meeting, which comes two days after the US Presidential election, with the NFP jobs data the Friday before(!) The pound has been trying to consolidate recently after selling off quite sharply on Bank of England Governor Bailey’s dovish comments at the start of the month. He said the MPC might be a bit more aggressive in cutting rates, provided that the inflation news continues to be good.

Consensus sees the annual headline CPI figure easing to 1.9% from 2.2%, after holding steady in the prior release. The core is also seen moderating, though by a smaller extent to 3.5% from 3.6%. That had risen from 3.3%, while the all-important services metric previously jumped to 5.6% from 5.2% due to unfavourable base effects and certain volatile sectors.

This time, the headline is likely to be weighed down by declines in fuel prices for the month; though recent price action in the energy space and ongoing geopolitical tensions means it is hard to say if this will be sustained. For service inflation, we note the BoE’s forecast in August was 5.5%, and many economists forecast a lower print, although the data has been volatile recently due to very choppy hotel prices, owing to the Taylor Swift effect.

From a policy perspective, this will be the final inflation report before the November policy announcement and the fresh quarterly Monetary Policy Report. Markets assign around an 80% chance of a 25 bps cut at that meeting, so there is still some room for dovish repricing. Decent support sits around 1.30 in GBP/USD. However, a hot release would provide ammunition to the more cautious hawks on the MPC and could set markets up for another split vote next month.

ECB Meeting

Expectations are for the ECB to lower the deposit rate by 25bps to 3.25%. Growth is even weaker than the ECB’s downwardly revised September forecasts, and inflation is coming back to target sooner than the end of next year’s staff forecast. Crucially, there is little apparent opposition from the Governing Council to further easing on Thursday. Even some hawkish members of the ECB have recently said that the bank cannot ignore the headwinds to growth.

The economic outlook has changed somewhat since the previous meeting when it was presumed the ECB would opt to lower rates in a gradual, measured manner, only at meetings that are accompanied by quarterly macro projections, whilst pausing at those that do not publish them. As a reminder, the bank cut rates in June, paused in July and cut in September. 

The first wave of market repricing for October was driven by the September PMI data which saw manufacturing slip further into the contractionary territory and services decline, which the composite was dragged into the contractionary territory; suffering its largest decline in 15 months. The latest inflation metrics added to the dovishness with the headline slipping below target to 1.8% from 2.2%, even though super-core inflation only dropped one-tenth to 2.7% and services inflation stands at a still elevated 4%.

Looking beyond October, a further 25 bps cut is near-enough fully priced in for December with four back-to-back cuts expected from this week’s meeting, with a terminal rate of 2% next summer. Certainly, this back-to-back move will signal a pivot to a faster easing cycle. But expectations are that the Governing Council and President Lagarde will not offer any forward guidance due to the uncertainty ahead. That comes in the form of many variables including certain still sticky inflation components like wage growth, the path of oil prices and the outcome of the US election.

Any talk of the risk of inflation undershoots, the job market weakening and rates being called restrictive will govern the size of a possible euro sell-off. These would be dovish hints that more rate cuts are coming and confirm an easier incoming rate path. If we lose 1.09 support in EUR/USD, then 1.0832 is the next major support. But the flip side and a steadfast, more gradual pace of easing may see the single currency supported. Full visibility on economic trends, especially the labour market and wage growth appears tricky at present.

EUR/GBP is likely to move sharply on different days according to the outcome of the UK data and ECB meeting. The long-term low from August 2022 sits at 0.8339, with 0.8294 and then 0.8202 on the downside. That may be challenged if GBP appreciates on stronger data or a more dovish ECB. A bigger rebound, possibly on a less dovish ECB, needs to move above 0.8433 and the 100-day SMA at 0.8444.