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Pound slips despite solid UK inflation
Core inflation in the UK rose by 1.4% year-on-year, slightly faster than the market expectation of 1.3%. The pound rebounded from the intraday low of 1.3172 against the US dollar on the back of the solid inflation report, yet slipped rapidly back below the 1.32 mark. The consumer prices remain comfortably below the Bank of England’s (BoE) 2% inflation target. Hence, the stronger-than-expected inflation read should have a limited impact on the mid-term bearish view on the pound, which trades with a strong negative skew given that the expectation of a rate cut toward the 0% has become the base case scenario. As of today, the market assesses a 83% probability for an August rate cut and nearly a 90% probability for a December cut.

The FTSE opened in the red as British manufacturers’ confidence regarding the future of their businesses declined to a two-year low following country’s decision to leave the European Union. The scope for lower rates is yet insufficient to cheer up FTSE investors.

Financials are under pressure on the expectation that lower UK rates could further squeeze profit margins and deteriorate earnings despite the sharp cost cutting programme across the industry. The manoeuvre margin in the banking sector narrows as the benefits from lower costs could gradually become insufficient to counterbalance the costs of operating in the challenging low rate environment. The weak earnings from the US banks also dent investors’ appetite in the UK’s banking sector.