PoundSterlingLIVE - The British Pound fell against the Euro and Dollar following the release of inflation figures that notably undershot expectations and signalled the pressure on the Bank of England to raise interest rates has receded notably.
Headline CPI inflation rose 6.7% year-on-year in August said the ONS, which was well under the 7.0% the market was expecting and below July's 6.8%. The month-on-month rise stood at 0.3%, which was less than half the expected 0.7% expected, albeit up on the -0.4% of July.
But for the Pound, it is the core inflation figure that is of particular relevance given the Bank of England judges it to be more relevant from a policy perspective: core rose just 0.1% m/m, below the 0.6% expected and 0.3% of July. The y/y increase measured 6.2%, which is below the 6.8% expected and 6.9% of July.
The annual CPI inflation rate in services slowed from 7.4% to 6.8%, something that will be particularly welcomed by the Bank of England given it has expressed concern over price rises in this particular section of the price basket.
The GBP/EUR exchange rate dropped sharply (-0.37% to 1.1559) on the figures as markets bet there was enough in them to prompt the Bank of England to pause its interest rate hiking cycle on Thursday.
The GBP/USD exchange rate was lower by a similar margin at 1.2354.
The market had entered this week pricing 80% odds of another Bank of England interest rate rise of 25 basis points being delivered on Thursday, but the sharp fall in the numbers have lowered such a prospect.
The fall in UK gilt yields in response to the figures helps explain the weaker Pound and signals the market's belief that the UK's 'exceptional' inflation problem is fading.
Indeed, UK workers are now seeing real terms increases in pay given pay rates are now well above the rate of inflation.
The fall in inflation when compared to July is all the more remarkable as economists had expected an increase owing to the recent rise in fuel prices, indeed the ONS said rising prices for motor fuel led to the largest upward contribution to the change in the annual rates.
But the impact of rising fuel prices was overshadowed by the fall in food prices, which contributed the largest downward pull, followed by accommodation services.
The impact on the Pound of the inflation undershoot is clear to be seen, but from a longer-term perspective, the prospects for the UK consumer, businesses and economy as a whole are greatly improved if inflation continues to decline.
Should foreign exchange markets become increasingly sensitive to growth dynamics - as some analysts are now arguing - then a more constructive outlook begins to emerge for the Pound.
"Inflation fell again in August, defying expectations of a slight uptick. We expect inflation to continue falling over the rest of this year," says Alpesh Paleja, Lead Economist at the CBI.
An original version of this article can be viewed at Pound Sterling Live
