Inflation Concerns, Policy Divergence, and Market Sentiments in the UK

Amidst the recent global revaluation of inflation, Megan Greene, a steadfast MPC member, advocates for a proactive stance. Addressing concerns in Leeds, she calls for an upward adjustment of the Bank of England’s policy rate, cautioning against the potential risks of a too-conservative approach. Greene questions the assumed restrictiveness in the current monetary stance, suggesting it might be less robust than perceived, especially in scenarios of persistent inflation.

Validating Greene’s concerns, core and services inflation in the UK paint a complex picture. While the headline inflation rate recedes to 4.6%, services inflation remains elevated at 6.6%, attributed to domestically generated inflation tied to labour market dynamics. Recent labour indicators, including a 3.5% unemployment rate and a 7.9% 3-month annual growth in wages, align with this perspective. The BoE’s Decision Maker Panel survey forecasts a 4.4% inflation expectation for the next 12 months, maintaining a slightly diminished projection of 3.2% for the subsequent three years.

Despite a modest descent, these figures remain notably high. Catherine Mann emphasizes the need for services inflation to decrease from the current 6%-plus level to 3% for effective overall inflation management. The BoE’s distinct concern about domestically generated inflation within the UK, compared to the US or the euro-zone, sets the stage for potential policy divergence.

Looking ahead, market sentiment anticipates a 25 basis points cut by the BoE in August, diverging from the forecasts of the ECB and the Federal Reserve. This divergence in policy expectations leaves the EUR/GBP vulnerable to further depreciation, as recent evidence of accelerated declines in inflation influences the ECB’s stance.

Simultaneously, the GBP-USD pair exhibits modest strength, bolstered by hawkish BoE remarks and favourable data. Haskel emphasizes the need to prevent the economy from becoming entrenched in embedded inflation, echoing Greene’s caution against “doing too little.” Despite the hawkish tones from BoE officials, market sentiment leans towards expectations of three rate cuts by the end of 2024.

Today’s data presents a nuanced picture, with November’s house prices showing a third consecutive monthly increase, though still 2% lower than last year. The final manufacturing PMI for November improved to 47.2, providing a somewhat better outlook. However, continuous declines in production, coupled with downtrends in new orders and exports, temper the optimism. The market remains cautious, and while the overall narrative suggests improvement, challenges persist in the economic landscape.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

  • Read this next

    Retail FX

    Lark Funding reopens to US traders, MyFundedFX picks cTrader

    Canada-based prop trading firm Lark Funding announced it will once again welcome clients from the United States.

    Institutional FX

    Cboe FX volume falls to lowest level since summer

    Cboe’s institutional spot FX platform, known as Cboe Spot, today announced its trading volume for the month ending February 2024, which took a step back after a strong rebound in December.

    Retail FX

    ThinkMarkets secures lucrative DFSA license in Dubai

    Melbourne-based broker ThinkMarkets has secured a license from the Dubai Financial Services Authority (DFSA) after it has already incorporated its new subsidiary in the Dubai International Financial Center (DIFC).

    Digital Assets

    New Horizen Lays Out Its Vision Of A Modular, Proof Verification Layer For Web3 Networks

    Horizen is forging a new path for the future of blockchain with its New Horizen initiative, which is building a modular Proof Verification layer that’s dedicated to verifying cryptographic proofs for any settlement layer, beginning with Ethereum. 

    Digital Assets

    Karma3 Labs Raises a $4.5M Seed Round Led By Galaxy and IDEO CoLab to Build OpenRank, a Decentralized Reputation Protocol

    Using OpenRank, developers and web3 companies can build consumer apps where people can discover, use, fund, read, or buy something on-chain without worrying about getting spammed or scammed.

    Digital Assets

    Worldcoin down as Elon Musk sues OpenAI CEO Sam Altman

    Worldcoin’s (WLD) token dropped following news of a lawsuit against related company OpenAI. The lawsuit was filed by Elon Musk and accused OpenAI and CEO Sam Altman of breach of contract.

    Institutional FX

    Exegy’s Liquidity Lamp adds intraday data to outperform S&P 500 by 31.8%

    Exegy has incorporated intraday signals into its AI-powered iceberg order detection tool, Liquidity Lamp. By adding intraday data to a baseline mean reversion strategy, Exegy’s model outperformed the baseline by 10.5% and the S&P 500 (SPY) by 31.8%, respectively in the out-of-sample testing.

    Industry News

    Think Elon Musk backed your crypto exchange? ASIC’s latest reveal may shock you

    In an absolutely shocking turn of events that nobody could have possibly seen coming, the Australian Securities and Investments Commission (ASIC) has bravely stepped forward to reveal that, yes, those videos of Elon Musk passionately endorsing a cryptocurrency exchange are as fake as a three-dollar bill.

    Fundamental Analysis

    Global FX Market Summary: EUR, USD March 1st, 2024

    The ISM’s February Manufacturing PMI is expected to show a slight increase, but remain below the expansionary threshold, while inflationary pressures persist and a Fed rate cut in June is still possible.

    <