Gilts experienced a rebound on Wednesday, and the FTSE 100 started the day on a positive note after the release of inflation figures that were lower than anticipated. The Office for National Statistics (ONS) reported a headline rate of 2.5 percent in December, a slight decrease from the previous month's 2.6 percent.
Services inflation, which is considered a more accurate indicator of domestic price pressures, fell to 4.4 percent from November's 5.0 percent, coming in under the 4.8 percent forecasted by analysts in the City, as reported by .
Michael Brown, a senior research strategist at Pepperstone, commented that the data would provide "significant relief" to both Rachel Reeves and Andrew Bailey amidst concerns in the º£½ÇÊÓƵ gilt market. Investors have recently been anxious about the potential for enduring inflation in the º£½ÇÊÓƵ, which has driven gilt yields to their highest levels in years as expectations for interest rate reductions diminished.
Nevertheless, yields eased across various maturities on Wednesday as market participants began to anticipate at least two cuts to interest rates within the year. "The Bank of England will likely feel emboldened to continue its easing cycle in February," noted Sanjay Raja, Deutsche Bank’s chief º£½ÇÊÓƵ economist.
In early trading, the yield on the two-year gilt sensitive to rate changes dropped by eight basis points, while the 10-year yield saw a six basis point decline. Equities also opened with gains, with housebuilders leading the way, buoyed by the prospect of further interest rate cuts.
The FTSE 100 witnessed a notable increase of 0.74 percent in early trading, buoyed by gains seen in homebuilding firms such as Persimmon, Taylor Wimpey, Barratt, and Berkeley, placing them amongst the top risers in the index. Meanwhile, reflecting optimism about the º£½ÇÊÓƵ's domestic economic health, the midcap FTSE 250 jumped 1.5 percent, reaching 20,056.85.
Sterling initially dipped but later made some headway against the dollar, though it remained essentially flat at $1.221. "The market isn’t too sure where to take the pound it seems," commented Kyle Chapman, an FX markets analyst at Ballinger Group.
A stark slide to its lowest position compared to the dollar in over a year marked the previous week for the pound, spurred on by concerns for the economic prospects of the º£½ÇÊÓƵ. Traditional logic holds that the anticipation of lower interest rates would devalue the pound due to smaller yields on investments, however, Kathleen Brooks, research director at XTB, pointed out that "these are not normal times for º£½ÇÊÓƵ assets".
She posited the possibility of a "short-term relief rally" for the pound, predicated on an expectation that interest rate reductions might temper worries surrounding stagflation.
