Those years of high interest rates seem finally to be having an effect, as inflation has just been revealed to have come crashing down to 3.2% annually, much lower than expected and with many prices falling last month. Food and non-alcoholic drinks dropped most, meaning Christmas lunch will be that bit cheaper this year.
It means that an interest rate cut from the Bank of England (BoE) is now assured tomorrow and more cuts could be sooner in 2026 than expected. GBP/EUR and GBP/USD have both dropped a quarter of a cent this morning, but only reversing yesterday’s gains.
It’s all a very different story from yesterday, when sterling strengthened on news that, despite unemployment hitting another post-pandemic high, wage rises are still way ahead of inflation at 4.7%. Economic orthodoxy now seems to have reasserted itself, with unemployment and inflation traveling in opposite directions.
Another rule of economics is that a country’s currency weakens as interest rates are cut – and this could be the fate of sterling in early 2026. If you don’t want a major purchase overseas to be subject to the ups and downs of the market, why not fix your rate with a forward contract? Speak to your account manager today on 020 8003 4915.
Yesterday’s Purchasing Managers Index (PMI) was also upbeat, with British businesspeople in both the services and manufacturing industries all more positive than predicted.
The USA has been playing catch-up with its own data as it released two sets of Non-Farm Payrolls data yesterday. It was all a bit of a mixed picture but tending to the negative and further undercut by a sharp rise in unemployment to 4.6% the dollar dipped in response.
We’ll get America’s inflation numbers tomorrow, and a drop similar to the UK’s could hit dollar exchange rates.
