The pound slid to a six-week low against the dollar after a government report showed inflation slowed more than economists forecast, giving the central bank more room to boost stimulus that tends to weaken a currency.
Sterling dropped versus all except one of its 16 major counterparts before the Bank of England publishes the minutes of its May 8-9 meeting tomorrow, which will reveal how many policy makers voted to boost asset purchases at the gathering. U.K. government bonds were little changed after rising when the inflation data was released.
“This is a negative for sterling because quite clearly weaker inflation opens the door for more monetary stimulus,” said Peter Frank, global head of head of currency strategy at Banco Bilbao Vizcaya Argentaria SA in London. “It’s not a huge undershoot but it’s a fairly weak number before tomorrow’s crucial minutes. It cements investor decision-making to sell sterling.”
The pound dropped 0.6 percent to $1.5157 at 4:32 p.m. London time after falling to $1.5113, the lowest level since April 4. The U.K. currency weakened 0.8 percent to 85.11 pence per euro, the biggest decline since March 7.
Sterling has weakened 3 percent this year, the second-worst performer after the yen among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 4.8 percent and the euro rose 2.3 percent.
Consumer prices climbed 2.4 percent in April from a year earlier, compared with 2.8 percent in March, the Office for National Statistics said in London. The median forecast of 35 economists in a Bloomberg News survey was 2.6 percent. Producer prices increased an annual 1.1 percent, the least since September 2009.
“There’s a bit of outperformance in gilts,” said Simon Peck, a rates strategist at Royal Bank of Scotland Plc in London. “The inflation undershoot has the market concerned that the reflation trade might be going away. I don’t think we’re going to see any imminent stimulus on the back of this but it very much keeps the door open to further gilt purchases.”
Gilts erased earlier gains amid speculation the Federal Reserve’s minutes of its meeting this month will show U.S. policy makers may taper the central bank’s bond-buying plan.
The 10-year gilt yield was at 1.92 percent after falling as much as four basis points, or 0.04 percentage point, to 1.87 percent. The 1.75 percent bond due September 2022 was at 98.57.
The so-called 10-year break-even rate, a gauge of expectations for inflation derived from the difference in yield between gilts and index-linked securities, fell four basis points to 3.09 percent after dropping to 3.08 percent, the least since May 3.
U.K. government bonds handed investors a loss of 2 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds fell 0.9 percent and Treasuries declined 1.2 percent.