Morning from Copenhagen.

The latest UK CPI print is in, and it’s notably softer across both services and core inflation. This data drop could signal a pivotal moment for the Bank of England (BoE), potentially mirroring the dovish stance recently adopted by the Bank of Canada (BoC).

While our outlook for the UK economy remains volatile, it’s worth noting that inflation in the UK has gained less traction compared to peers like the US or the Eurozone. Simultaneously, real-time indicators of liquidity and growth suggest a consistent loss of momentum. These dynamics paint a picture of an economy under strain, further supported by the lackluster performance of UK inflation swaps. Unlike their US and Eurozone counterparts, these swaps have struggled to gain momentum, hinting that the recent deceleration in growth may be suppressing consumption.

The latest inflation report appears to provide the BoE with the green light to pivot toward rate cuts. The combination of tepid liquidity and the evident distortions in the gilt market adds urgency to this potential shift. Fiscally, the UK government remains highly cautious, mindful of avoiding another “Liz Truss moment.” This caution implies reluctance to deploy significant fiscal stimulus, placing even more pressure on the BoE to act decisively—not just with rate cuts but potentially with measures aimed at restoring confidence in the UK bond market.

In the short term, these developments might spark a modest rally in the pound, as markets price in the BoE’s shift. However, we maintain a bearish outlook on GBP, favoring selling into rallies. On the equity front, the prospect of further rate cuts, and possibly even a QE-like environment, could provide a supportive backdrop for UK stocks, offering a silver lining amidst the broader economic challenges.

The BoE’s next steps will be critical. Will it follow the BoC’s path and embrace an easing cycle, or will it attempt to chart its own course in these turbulent times? Time—and the data—will tell.

Chart 1.a: UK CPI decomposed