Pound Falls Versus Dollar, Euro as U.K. Consumer Prices Stagnate

  • Consumer-price growth in line with Bloomberg survey forecasts
  • Gauge of market inflation wagers jumps after official report

The pound fell the most in more than a week against the dollar after a report showed U.K. consumer prices stagnated last month, fueling speculation the Bank of England is still months away from raising interest rates. 

Shorter-dated U.K. government bonds outperformed their longer-maturity peers, pushing up the spread between two- and 10-year yields to the most in two weeks. There was no U.K. inflation in August compared with a year earlier, a slowdown from the 0.1 percent consumer-price increase in the prior month, the Office for National Statistics said. The Federal Reserve will set interest rates on Sept. 17, a meeting at which economists are divided on whether policy makers will raise interest rates.

“People are cutting back on long sterling positions which were part of a policy divergence trade after the weak inflation data,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “The liquidation may weaken the pound in the near-term, but our view is that U.K. data should continue to outperform. The pound should resume its appreciation against the euro.”

The pound fell 0.5 percent to $1.5356 at 4:47 p.m. London time, the biggest decline since Sept. 4. It was little changed at 73.39 pence per euro, having earlier weakened as much as 0.3 percent.

‘Relative’ Strength

“On a relative basis, the U.K. is holding up quite well when placed in conjunction with the global slowdown,” Mizuho’s Jones said. “Before long, euro-pound should start to trade lower again.”

Core inflation -- which excludes more volatile food and energy costs -- slowed to 1 percent from 1.2 percent, also as predicted. BOE Monetary Policy Committee member Martin Weale said Sept. 13 that inflation may rise above the bank’s 2 percent target in two to three years’ time as a result of wage growth and a tightening labor market. Other central bank officials have reasoned that low inflation means they aren’t in a rush to increase interest rates.

The yield on the 10-year government bond climbed six basis points, or 0.06 percentage point, to 1.91 percent. The price of the 2 percent gilt due in September 2025 dropped 0.52, or 5.2 pounds per 1,000-pound face amount, to 100.82.

That left the yield spread to two-year notes at 127 basis points, the most on a closing-price basis since Aug. 31.

The 10-year break-even rate, a gauge of market inflation expectations derived from the yield difference between gilts and index-linked securities, rose four basis points to 2.52 percentage points. It slid to as low as 2.47 percentage points on Monday, the least since Aug. 28.

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