GBP/USD breached the 1.270 level this morning after a slightly hotter-than-expected UK CPI report for October, notes Francesco Pesole, ING currency analyst.

The next BoE interest rate cut will start in February

“We know the BoE is focused on inflation in services, so the augment in nominal and core CPI to 2.3% and 3.3% is not really material. Services CPI actually accelerated from 4.9% to 5.0%, which is in line with the BoE and our own forecast. However, much of this acceleration is due to elements such as airline tickets and rents, which the BoE says are less likely to indicate persistent inflation. According to our economist’s estimates, inflation in “essential services” fell from 4.8% to 4.5% in October.

“However, this is still insufficient to, in our opinion, induce a reduction in interest rates in December. Even if there is another inflation print before the next BoE meeting, we would likely need a pointed slowdown in services inflation to consider a rate cut. Our view is that services CPI will continue to jump around 5% over the next four months, before falling significantly lower in the second quarter of 2025, when we expect the BoE to accelerate its pace of monetary easing.

“We now see another BoE cut in February that is not fully priced in (19bps). We believe there will be room for a dovish sell-off that will negatively impact sterling next year, but the policy loophole with a dovish ECB is unlikely to close and we remain negative on EUR/GBP overall. In the short term, we maintain our decision that the pair will fall below 0.830.”