Pound Extends Losses After Weaker-Than-Estimated Inflation Data

  • Sterling drops against all except one of its major peers
  • Below-forecast price growth backs case for loose BOE policy

U.K. Unemployment Falls to 4.4%, Wages Top Estimates

The pound extended losses and fell to its lowest in a month versus the dollar after data showed inflation was weaker than forecast, reducing expectations of a rate increase by the Bank of England.

Sterling dropped for a second day and was lower against all but one of its major peers after consumer prices rose 2.6 percent in July from a year earlier, compared with the median economist forecast for a reading of 2.7 percent. Core inflation -- which excludes volatile food and energy prices -- was unchanged at 2.4 percent, also below what economists predicted.

The report backs the case of the majority of BOE officials who argue that they should wait before raising interest rates from a record low because the economy is not strong enough to absorb tighter policy, even as inflation breaches their 2 percent target. While two of the eight Monetary Policy Committee members backed higher borrowing costs at their latest meeting earlier this month, BOE Governor Mark Carney said the uncertainty from Brexit supported maintaining stimulus.

“The knee-jerk reaction was to sell the pound on the back of softer U.K. inflation report,” said Lee Hardman, a strategist at MUFG in London. “The basic thinking being that there is a reduced immediate need for BOE to raise rates. Although if inflation is peaking sooner and lower than expected, it is also supportive for the U.K. econcomy.”

U.K. government bonds earlier dropped as North Korean tensions faded, reducing demand for haven assets.

  • GBP/USD -0.3% to 1.2923
    • Support at 1.2907, July 12 high
  • EUR/GBP +0.1% at 0.9100
  • “The pound’s reaction seems reasonable,” said Richard Falkenhall, a strategist at SEB AB in Stockholm. “One reason for the BOE’s hawkishness was that inflation could continue higher from here. That appears less likely after today’s number”
  • Yield on 10-year gilt rises 3bps to 1.10%
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