GBP lost a little territory yesterday against EUR and USD, after a surprisingly low inflation print. With inflation on a declining path, there should be no imminent pressure on Bank of England from the inflation knock-out criteria on the 7% unemployment rate threshold in the forward guidance. Hence, most important factor in terms of forward guidance remains the unemployment rate. Today, we look for a minor decline in ILO unemployment rate (in line with consensus), which viewed in isolation should be GBP positive. However, most important event today for GBP will be the release of Bank of England’s November inflation report. GBP has been the best performing currency among majors during the past month as the continuing strong rebound in UK data has increased expectations that the central bank will communicate the 7% threshold to be met somewhat earlier than Q3 16, as implied from the August Inflation Report. Hence, despite high expectations already priced in, we still favour being short EUR/GBP in order to position for further EUR weakness after ECB’s surprise rate cut last week.
On the back of yesterday’s inflation shock we have revised our call on the Riksbank and now expect a 25bp rate cut in December. The bank is likely to maintain its easing bias even after the cut and we expect it to postpone the first rate hike further out into 2015. The market is pricing in only a 50% chance of a cut (6bp for December and an additional 6bp in February). Hence, we think that EUR/SEK has more to do on the upside before this is over. As a consequence, we have raised our EUR/SEK 1M target to 9.00 while acknowledging that the pair might get stuck above 9.00 for a period of time. We prefer long NOK/SEK over long EUR/SEK based on relative monetary policy and relative inflation and thus yesterday we recommended to go long NOK/SEK at 1.0725 with a target at 1.10 and stop-loss at 1.06.