Pesole Warns Sterling Faces Persistent Bond Volatility Risks

Pound Sterling continues to battle external headwinds, with recent weakness largely driven by heightened sensitivity to fixed income market turbulence. ING’s FX strategist Pesole highlights that calmer sentiment could allow EUR/GBP to edge back toward 0.870 levels, potentially easing some of the currency’s current downside pressures.

December Inflation Data Offers Limited Surprises for Policy Makers

The latest UK inflation report released in early December provided little to shift expectations around the Bank of England’s near-term strategy. Core services inflation—the BoE’s preferred measure that filters out volatile and indexed components—held steady at 4.0% for the third consecutive month, signaling stability in this critical gauge. However, headline inflation ticked up slightly more than anticipated to 3.4%, with food price acceleration to 4.5% accounting for much of this movement. While monetary policy committee members are monitoring food inflation closely, current levels remain substantially below the BoE’s own forecast of 5.3%, leaving room for potential normalization.

Bond Market Volatility Creates Currency Headwinds

According to Pesole’s analysis, Sterling’s recent underperformance has primarily reflected the market’s wariness around imported bond volatility—particularly concerning for a currency that has demonstrated negative correlation with longer-dated yields amid fiscal concerns. The ING analyst notes that periods of calmer market conditions this morning suggest EUR/GBP could face renewed downward momentum and potentially slip back below the 0.870 threshold. This dynamic underscores how closely Sterling remains tethered to broader fixed income sentiment.

February BoE Decision Unlikely to Alter Course Near-Term

Looking ahead to the Bank of England’s February gathering, nothing in the December inflation data appears likely to materially influence the committee’s trajectory. James Smith, ING’s UK economist, emphasizes that the core services reading—maintaining its 4.0% consistency—remains the most telling indicator for monetary policy thinkers. Food price acceleration, though notable, sits well within acceptable parameters relative to BoE projections, suggesting the committee may maintain its current wait-and-see posture pending clearer signals on underlying inflationary pressures.