UK inflation data helps drive sterling lower

• UK inflation remains flat, but underlying picture points towards sharp declines to come
• Eurozone GDP flat, but industrial production surges in December
• US markets expected to regain ground after yesterday’s declines

The FTSE 100 has pushed sharply higher in early trade, as traders take on a more constructive tone following yesterday’s US CPI fuelled sell-off. However, today it was the turn of the UK to highlight their more realistic pathway back down to target, with a -0.6% decline on monthly CPI lifting hope that we will soon see the headline inflation gauge head back down towards target. It can be difficult to know how much to read into a report that will have been heavily influenced by January sales, with last year seeing a similarly sharp decline in monthly prices. Shoppers waiting until the post-Christmas period were clearly rewarded, with particularly notable drivers of disinflation coming furniture and households goods (-3.1%), alongside clothing and footwear (-3.9%). Those hoping for a dovish pivot from the Bank of England need not wait too long, with markets increasingly betting that we will see the bank embark upon a series of rate cuts from June. However, with headline CPI currently on a pathway that could see it fall well beyond the 2% target, there is a strong chance that we see the bank move as early as May. For the pound, this is bad news, with the sharp declines seen today serving to highlight the potential downward trajectory that could play out as we see inflation tumble back down towards target in the coming months. All eyes turn to the Bank of England’s Andrew Bailey today, with traders hoping that the Governor will shed greater light on his perceived outlook for monetary policy considering the recent inflation and jobs data.

The eurozone managed to steer clear of a recession in the fourth quarter, according to the latest GDP revision released this morning. Coming off the back of a -0.1% third quarter reading, traders had been watching for a potential downgrade that would have confirmed a technical recession of two consecutive quarters of negative growth. With industrial production enjoying a 2.6% jump in December (best since mid-2022), we are seeing some signs that the region is starting to pick up after what has been a particularly tough few years for manufacturers.

US markets look set for a more upbeat tone today, as traders take on a more constructive view following yesterday’s risk-off volatility in the wake of the US CPI release. While Jay Powell has spent months warning markets that their outlook over 2024 rate cuts was way off the mark, yesterday provided yet another reminder that we are unlikely to see inflation fall back down to the 2% target in H1. Market pricing for a March rate cut has essentially gone, and we are now gradually seeing confidence in a May rate cut fade somewhat. Nonetheless, with US markets seemingly able to rely on big tech to steer the indices up into fresh highs, it looks like investors are seeing yesterday’s sell-off as an opportunity to buy-the-dip once again.