Hot UK CPI data: British Pound holds broadly steady

• Despite volatility following the UK CPI release, the British Pound is broadly unchanged.
• September’s UK headline and core CPI both rose more rapidly than forecast.
• Hawkish BoE expectations could strengthen following robust UK employment and CPI readings.

At around 211.45, the British Pound (GBP) is nearly unchanged against the Japanese Yen (JPY). Sterling has swung against its peers but remains broadly flat following September’s stronger-than-forecast United Kingdom (UK) Consumer Price Index (CPI) release.

Headline CPI accelerated to 3.5% Year-on-Year (YoY), according to the Office for National Statistics (ONS). That exceeded the 3.4% forecast and August’s 3.1% reading. Core CPI, which strips out volatile food, energy, alcohol and tobacco components, increased by 2.8% YoY over the same period. This was above expectations of 2.7% and the previous reading of 2.6%.

The monthly inflation reading was 0.4%, exceeding the 0.3% forecast but easing from 0.5% in the previous release.

Better-than-forecast UK labour market figures for the three months to August were also released on Tuesday. Together with the elevated CPI readings, the strong jobs data will likely strengthen expectations that the Bank of England (BoE) will raise interest rates at its November policy meeting. The BoE has kept rates unchanged at 3.75% so far this year.

Upside risks to inflation were also highlighted on Tuesday by BoE Monetary Policy Committee (MPC) member Megan Greene. She warned that second-round inflation effects could begin to emerge.

BoE’s Greene: Stalled Wage Disinflation Sustains GBP Rate Hike Risk

A 7.4/10 reading on the FXS Speechtracker puts BoE’s Greene exactly at her historic average. The score points to an unchanged tone, rather than stronger rhetoric. Her emphasis on wage disinflation stalling above levels compatible with 2% inflation, coupled with her view that policy should act proactively against second-round effects, indicates a distinctly hawkish bias for GBP.

Although forward-looking indicators suggest pay growth is moving closer to 3.5%, Greene sees a greater risk of second-round inflation effects than previously assessed. That view strengthens the argument for maintaining tight policy. Her references to unexpectedly resilient economic activity and the possibility that labour market slack has peaked imply limited downside risks to growth. This supports the case for continued GBP support as markets price in a slower pace of future rate cuts.

Japan’s September National CPI figures are due on Friday, with investors awaiting the release.