BUZZ-COMMENT-Bond vigilantes await pivotal UK CPI

Jan 14 (Reuters) - The bond vigilante trade is seemingly back for the UK, meaning the scars of 2022 have resurfaced. UK bonds have sold off aggressively this year, increasing market angst over the UK’s deteriorating fiscal position, creating something of a negative feedback loop.

Consequently, the upcoming UK inflation report (January 15) is huge for both GBP and gilts.

With this mind, traders could reduce exposure to UK assets in the lead up to the data, potentially leading to UK 10-year yields taking out the recent highs at 4.90-4.92% and thus keep sterling on the backfoot.

This has been evidenced by the morning’s price action: the opening gap lower in UK 10-year yields has been quickly pared, while the relief bounce in GBP/USD on reports the Trump administration may scale in tariffs gradually has also been short-lived.

Such price action not only signals that traders are more concerned over a stronger CPI print but also emphasises that the upcoming UK and U.S. inflation reports will be the key drivers for GBP and gilts.

As is often the case, services CPI will be pivotal. The consensus view is for a 0.1 percentage point drop to 4.9%, while the Bank of England projected a drop to 4.7% in its November monetary policy report.

While a topside surprise would typically be met with a stronger currency, concerns over the UK’s fiscal position means the reverse may happen, with the UK 10-year yield possibly breaking above 5%. Should this also follow a hot U.S. CPI print, this would open the door for GBP/USD to fall to 1.20.

For more click on FXBUZ

(Justin McQueen is a Reuters market analyst. The views expressed are his own.)

((justin.mcqueen@thomsonreuters.com))