• GBP/CAD edges lower as UK inflation fails to derail BoE easing expectations.
• Headline CPI rises to 3.4% YoY; core inflation holds at 3.2%.
• Swaps markets price in around 50 bps of BoE rate cuts over the next twelve months.

The British Pound (GBP) edges lower against the Canadian Dollar (CAD) on Wednesday, as the latest UK inflation data fails to derail market expectations for a gradual easing path from the Bank of England (BoE). At the time of writing, GBP/CAD trades around 1.8540, down nearly 0.22% on the day.

Data released by the Office for National Statistics showed that UK consumer inflation remained sticky in December. The Consumer Price Index (CPI) rose 0.4% on the month, matching forecasts, after falling 0.2% in November. On a yearly basis, headline CPI accelerated to 3.4% from 3.2%, edging above market expectations of 3.3%, while core inflation held steady at 3.2%.

The modest uptick in headline inflation has dimmed hopes for an interest rate cut at the Bank of England’s February meeting. However, employment figures released a day earlier pointed to a cooling labour market, keeping the door open for rate cuts later this year as policymakers balance sticky inflation against a softening growth backdrop.

BoE Governor Andrew Bailey said last month that he expects inflation to return to around the Monetary Policy Committee’s (MPC) 2% target by the middle of this year.

According to a BHH report, the swaps curve is pricing in over an 80% chance that the BoE will cut rates by a total of 50 basis points (bps) over the next 12 months.

Elsewhere in the inflation report, Producer Price Index (PPI) data pointed to easing pipeline pressures, even as the Retail Price Index (RPI) showed retail inflation remained elevated. PPI output prices were flat on the month in December, while the annual rate held steady at 3.4%. By contrast, RPI rose 0.7% MoM after falling 0.4% previously, with the yearly rate accelerating to 4.2% from 3.8%.

On the Canadian side, the economic calendar remains relatively thin, with only second-tier data offering limited direction. The Industrial Product Price Index fell 0.6% MoM in December, well below expectations for a 0.3% rise. Meanwhile, the Raw Materials Price Index rose 0.5% on the month, beating forecasts for a 0.5% decline.