Pound Falls as Drop in Core Inflation Adds to `Brexit' Concerns

  • Headline rate rises while remaining well below BOE's 2% target
  • Inflation data come two days before EU summit in Brussels

The pound weakened after data showing a slowdown in U.K. core inflation further diminished the prospect of a Bank of England interest-rate increase in 2016.

Sterling dropped to a two-week low against the dollar and sank versus all but two of its 16 major peers before a crucial European Union summit in Brussels where the British government will try to reach a deal altering the terms of its membership. While the U.K.’s headline inflation rate for January quickened to 0.3 percent, that’s still a fraction of the BOE’s 2 percent target, suggesting officials won’t be able to tighten policy for some time.

"The picture for prices in the U.K. continues to show that there is no great pressure," said Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA in Milan. "Clearly the market would be even more convinced that the Bank of England is in no hurry to start the tightening process," he said.

Investors can expect further volatility in sterling as uncertainty around Brexit builds, Mialich said. "Once the whole machine has been kicked off, the market would become very sensitive to polls suggesting who is leading the race, as it happened in the case of the Scottish referendum in the past," he said.

Sterling fell 1 percent to $1.4287 as of 4:45 p.m. London time, after sliding to $1.4277, the lowest since Feb. 1. It declined 0.9 percent to 77.98 pence per euro, its first drop in three days, and approaching the more-than-one-year low reached last week.

Consumer Prices

Annual growth in core consumer prices, which exclude volatile food and energy prices, slowed to 1.2 percent from 1.4 percent in December, while the headline inflation rate was the highest in a year.

"The probability of a leave vote is under-priced in markets," said Mark Dowding, co-head of IG debt at BlueBay Asset Management. "We are short at the moment and this is a position we would be very happy to add to," he said.

A short position is a bet on a fall in the asset’s value. BlueBay manages $58 billion, according to Dowding, who sees pound going down to $1.25 if the U.K. were to leave the common bloc.

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