Pound Declines as Traders Look Beyond Higher Inflation Rate

  • Annual CPI hasn’t reached BOE’s target since December 2013
  • Services, manufacturing output reports due on July 22

BOE Inflation Can Only Move GBP So Far, Says Halpenny

The pound fell even as a report showed the U.K.’s annual inflation rate accelerated more in June than economists forecast, with traders awaiting the first data that indicate the state of the nation’s economy since last month’s Brexit vote.

Sterling weakened versus all except two of its 16 major peers. U.K. consumer prices climbed 0.5 percent last month from a year earlier, the Office for National Statistics said in London. Analysts had expected the rate to rise to 0.4 percent, from 0.3 percent in May, according to the median estimate in a Bloomberg survey. The Bank of England’s 2 percent inflation target was last reached in December 2013.

The International Monetary Fund lowered its outlook for U.K. growth after the country voted to leave the European Union and forecast Britain’s economy will grow at its weakest pace since 2012 next year.

Most of the inflation data came from the period before the U.K.’s vote to leave the EU on June 23, and therefore don’t capture the pound’s sharp depreciation since the decision to leave the world’s biggest trading bloc. A weaker currency is likely to make imported goods and raw materials more expensive.

Traders are now looking at fresh indicators on how the referendum has affected the country’s economy. The first post-referendum surveys tracking output among the services and manufacturing industries, as measured by purchasing managers, are due this week.

‘Subdued’ Data

“I suspect that we will move lower this week as real economy data will be subdued, while the one-off flash PMI on Friday risks revealing the scale of the post-Brexit deceleration,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. These reports are likely to “set the tone” into the BOE’s decision in August, he said.

The pound fell 0.9 percent to $1.3135 as of 4:37 p.m. London time. It dropped to a 31-year low of $1.2798 on July 6. The U.K. currency weakened 0.4 percent to 83.85 pence per euro.

Sterling climbed to a two-week high of $1.3481 on July 15, a day after the BOE unexpectedly left rates unchanged. Even so, it’s still the worst-performing Group-of-10 currency in the past month.

The BOE signaled last week it’s readying stimulus for August as the economy reels from Britain’s decision to quit the European Union. Minutes of the central bank’s July meeting showed most members of the Monetary Policy Committee expect policy to be loosened next month.

Rate Outlook

Futures contracts indicate an 82 percent chance of a cut in August, compared with 14 percent on June 23, the day of the EU referendum. BOE officials led by Governor Mark Carney are scheduled to announce their next decision on Aug. 4.

The 10-year break-even rate -- a gauge of the retail-price inflation outlook derived from U.K. government bond yields -- has been rising since the referendum, and was at 2.38 percent Tuesday, from 2.31 percent on June 23. It climbed to 2.44 percent on July 7, the highest on a closing-price basis since Jan. 28.

“We think deterioration in activity data and rising expectations for BOE easing should push sterling-dollar lower in the near term, even if the bulk of the Brexit impact on the pound is likely behind us,” BNP Paribas foreign-exchange strategists, led by Steven Saywell, wrote in a note to clients Tuesday. “Rising U.K. inflation will be no impediment to aggressive easing starting next month.”

Slower Growth

The IMF said in its World Economic Outlook on Tuesday that Britain’s gross domestic product will rise 1.7 percent this year before expansion cools to 1.3 percent in 2017, the slowest for a calendar year since the height of the euro-area sovereign debt crisis in 2012. The latest projections compare with forecasts for 1.9 percent and 2.2 percent published in June, just before the EU referendum.

“If it’s easing of monetary policy that solves all the U.K.’s woes while the IMF revises its forecast and everybody else does the same, we’re going to see a lot more downside in sterling,” said Kit Juckes, a global strategist at Societe Generale SA in London.

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