Pound Hurt by Election Faces Fresh Hurdle as Inflation StagnatesLukanyo Mnyanda
Already struggling amid a U.K. election campaign that shows no sign of a clear winner, sterling may face a new obstacle. Stagnant consumer prices are boosting bets the Bank of England will hold off on raising interest rates.
The pound slipped the most in more than a week against the euro after a report by the Office for National Statistics in London showed annual inflation was stuck at zero in March. That threatens to remove a key support for the currency, whose slide this year versus major peers including the dollar and the yen has been tempered by the prospect of a rate increase.
While “you can blame the latest underperformance of sterling on that pre-election uncertainty, most recently evidence of persistent core disinflation is adding to the market concerns,” said Valentin Marinov, head of Group of 10 foreign-exchange research at Credit Agricole SA’s corporate and investment banking unit in London. Inflation “is adding to the case for low rates for longer.”
Sterling depreciated 0.2 percent to 72.18 pence per euro as of 5:26 p.m. London time, the biggest drop since April 2. It earlier touched 71.82 pence per euro, the strongest level since March 19. The pound rose 0.7 percent to $1.4774, cutting its decline during 2015 to 5.2 percent.
The dollar fell against all of its 16 most actively traded peers after a report showed retail sales gained less than forecast last month, fueling speculation the Federal Reserve is in no hurry to start raising interest rates. The U.S. currency dropped 0.9 percent to $1.0661 per euro, the biggest decline since April 2.
With less than four weeks to go until the May 7 general election, swings in the pound have jumped, with polls showing Labour and the Conservatives still neck and neck with neither likely to win enough votes to get an absolute majority.
A measure of anticipated price swings in the pound against the dollar in a month’s time climbed to as much as 13.64 percent on April 9, the highest since June 2010, according to data compiled by Bloomberg. It was at 11.91 percent on Tuesday, which is up from 6.9 percent at the end of last year.
U.K. government bonds rose, with the 10-year yield falling eight basis points, or 0.08 percentage point, to 1.51 percent. The 5 percent gilt due in March 2025 climbed 0.84, or 8.40 pounds per 1,000-pound face amount, to 131.92.