UK inflation undershoots expectations, boosting bets on a Bank of England rate cut and weighing on the pound against major currencies, BBH FX analysts report.

Market prices in BOE rate cut by year-end

"GBP dropped against all major currencies as cooler UK inflation raised Bank of England (BOE) rate cut bets. In September, headline CPI printed at 3.8% y/y for a third consecutive month (consensus and BOE forecast: 4.0%), core CPI unexpectedly eased to 3.5% y/y (consensus: 3.7%) vs. 3.6% in August, and services CPI remained at 4.7% y/y for a second straight month (consensus: 4.8%, BOE: 5.0%)."

"The BOE next policy decision and Monetary Policy Report are on November 6. The swaps market price in roughly 70% odds (up from 40% before the CPI release) of a 25bps cut to 3.75% by year-end. Over the next 12 months, the swaps market implies between 50-75bps of easing and the policy rate to bottom between 3.25%-3.50%. The expected fiscal drag from the upcoming UK budget (scheduled for November 26) will likely leave room for the BOE to deliver more easing."

"The UK’s disinflationary progress, albeit slow, reduces risk of the economy slipping into stagflation. That limits GBP/USD downside. Next support levels are offered at 1.3250 (October 14 low) and 1.3216 (200-day moving average). On the crosses, we see further GBP underperformance versus EUR and CAD. ECB is likely done easing, and the Canadian government is poised to unveil a stimulative budget on November 4."