LONDON (Reuters) - The pound dropped to a four-month low against the dollar on Thursday, still under pressure after the higher-than-expected U.S. inflation print the day before, but gained on the euro which was soft after the European Central Bank meeting.
The pound was down 0.17% on the dollar at $1.2516, its lowest since mid December, extending falls after a 1.1% drop the day before, its biggest one day fall since October.
That decline came after U.S. inflation which was hotter than expected, and caused markets to push back expectations of the first Federal Reserve rate cut from June to September, sent the benchmark 10-year Treasury yield up by 19 basis points, its most in a day in 18 months, and drove the dollar higher across the board.
"In our view, the March CPI print makes a June rate cut untenable, while our forecast for a more gradual decline in inflation makes two cuts this year more likely than three," said analysts at BNP Paribas (EPA:BNPP) in a note.
Expectations that the Bank of England would cut after major peers had helped
Markets also pushed back their expectations for Bank of England cuts and now see August as the most likely date for a move. But the impact on U.S. assets have been greater however, and the gap between U.S. and British 10 year yields is roughly 36 basis points trading around its widest this year.
The bigger domestic news that could shape Bank of England pricing is not due till next week in the form of inflation and labour data.
Versus the euro the pound has also been shaped by factors beyond Britain in the form of Thursday's European Central Bank meeting at which policy makers maintained rates at a record high but signalled cuts could come soon, likely in June.
The euro dropped after the meeting across most peers, and fell 0.15% versus the pound to 85.54 pence, but remained roughly in the middle of the recent narrow range in which it has traded this year.
"The statement and press conference indicate that the base case for the European Central Bank remains one of a June cut, unless data proves otherwise," said Mohit Kumar, chief European economist at Jefferies.