UK's pound falls below one-month high as inflation drops

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UK's pound falls below one-month high as inflation drops

LONDON, Oct 20 Reuters - Sterling fell below a one-month high on Wednesday as traders said a dip in September inflation was unlikely to stop the Bank of England from raising interest rates soon.

Consumer prices rose 3.1% in annual terms in September, easing back from 3.2% in August, the Office for National Statistics said. A Reuters poll of economists had predicted inflation of 3.2% in September, although 11 of the 34 analysts polled predicted a slowdown.

But with the Bank of England expecting inflation to exceed 4% by year-end and many economists forecasting even higher rates in 2022 after a surge in energy prices and rising pressures in the food sector, investors still see policymakers hiking soon, possibly as early as next month.

The pound was marginally down to $1.3784 by 0830 GMT, below a one-month high of $1.3834 reached on Tuesday.

Against the euro, the pound was unchanged at 84.34 pence Some analysts believe money market traders have gotten ahead of themselves in pricing BoE rate tightening - markets expect a cumulative 90 basis points of hikes by September 2022 - leaving the pound vulnerable to a batch of weak data.

Even before this inflation release this morning we were arguing that the forward OIS overnight index swaps market was indicating an excessive degree of monetary tightening priced into the markets, said MUFG analyst Derek Halpenny.

This leaves us of the view that the pound is vulnerable to some degree of correction to the downside, although perhaps not just yet. Although sterling has rallied in recent weeks, it has not moved as fast as might have been expected given the change in BoE rate expectations.

That is because of concern the UK economy is vulnerable to tighter policy as it emerges from the pandemic and as Brexit-related supply chain shortages and relatively high rates of COVID - 19 cases keep traders cautious about the outlook.