Market attention will now turn quickly to today’s policy updates from the BoE and ECB to see if they follow the Fed and deliver similar dovish policy signals that open the door to rate cuts from early next year.

Of the three major central banks we thought that the BoE would have the most credibility in pushing back against dovish market pricing that could help the Pound to outperform both the Euro and US Dollar in the near-term based on the view that the risk of more persistent inflation in the UK currently appears to be higher. However, data releases in recent days have cast some doubt on the view that the BoE will lag the ECB and Fed in cutting rates next year. 

After a poor start to the quarter, it looks likely that the UK economy will continue to stagnate at best in Q4 compared to the BoE’s forecast for a marginal pick-up in growth by 0.1%. While the developments are unlikely to stop the BoE from pushing back again today against earlier rate cut expectations, if the softening growth inflation data continues into early next year it will encourage the BoE more quickly into a dovish policy pivot. As a result. the near-term window for relative Pound outperformance against the Euro and US Dollar could prove short-lived.