FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the UK CPI headline inflation has recorded a number in line with expectations at -0.1% y/y and this is the third consecutive negative reading in a row. Key Quotes “Despite the maintenance of very accommodative monetary conditions by the BoE, according to the ONS, the average rate of UK inflation for the year to date is close zero. Moreover there has been very little variance in the rate this year.” “While this is clearly worrying, an improvement may be in sight. As last year’s drop in oil prices falls out of the system there is optimism that the UK will start to edge away from the current round of deflationary forces meaning that the October CPI inflation rate could mark a trough.” “We would argue that currently wage inflation data may be a better measure of potential demand driven inflation in the UK economy. The UK unemployment rate has been trending lower since early 2012. This year, however, there have been signs that the fall in the jobless rate has been tapering out. This could be a result of reduced demand for labour.” “The core CPI was a little stronger than expected at 1.1% y/y which gives credence to expectations that domestic demand may be improving.” “In addition to weak food and energy prices, sterling strength has been driving down UK inflation. The pound is the second best performing G10 currency over the past year after the USD. This is related to the fact that with the exception of the Fed and the BoE, all other G10 central banks have eased monetary conditions this year.” “We would suggest that the dovish tone from BoE Governor Carney at the presentation of this month’s Inflation Report may have been significantly influenced by a desire to avoid a punitive cost being slammed on UK economic activity via the value of sterling. Despite warning that the next policy move would be a hike, the BoE managed to convey its message this month in a very dovish way.” “The value of the UK effective exchange rate is currently around 3.5% above its October low. One of the driving factors of this move has been the very dovish tone of ECB President Draghi since the start of last month. If the ECB pressure the value of the EUR lower by increasing policy stimulus in December, there is risk that the UK would suffer a tightening in monetary conditions via an appreciation in the value of sterling.” “As a result the policy actions of the ECB will be closely watched by the BoE. It follows that the more aggressive the ECB is in its policy decisions, the less reason the BoE is likely to have to rush into a rate hike. We are currently expecting steady rates from the BoE until August 2016. We favour selling EUR/GBP into rallies and look for a move towards 0.68 medium-term.” For more information, read our latest forex news.