PoundSterlingLIVE - Pound Sterling dipped against its peers after UK inflation undershot expectations and kept alive hopes that Bank of England interest rate cuts would commence in the summer.
The Pound to Euro exchange rate fell to 1.1730 after it was announced UK headline CPI inflation read at 4.0% year-on-year, unchanged on December, but below the 4.2% figure the market anticipated and the 4.1% the Bank of England forecasted in its February policy update.
This was after the month-on-month change was reported at -0.6%, which was down on December's +0.4% and significantly below the -0.3% the market anticipated.
The Pound to Dollar exchange rate fell to 1.2567 after the all-important core CPI reading was reported at 5.1% y/y, unchanged on December and below expectations for 5.2%.
The Bank of England has said inflation will fall sharply to the 2.0% target as soon as April, largely thanks to the upcoming reduction in energy bills, but will then steadily recover to approximately 3.0% by year-end, underscoring a belief inflation will remain 'sticky' above 2.0%.
This is because core inflationary pressures linked to inflation-beating wage increases will continue to frustrate the Bank's goal of hitting 2.0%.
These data for January underscore that core inflation remains elevated and the Bank of England is right to stay vigilant and keep interest rates steady for some time to come.
However, the undershooting against expectations will offer policy-makers some relief in light of Tuesday's strong U.S. inflation print and will maintain market confidence that rates can be cut by the time summer comes around.
The British Pound should ultimately remain supported against European currencies, given softer inflation dynamics emerging in Europe, and these post-release losses should remain contained to recent ranges. However, downside risks against the Dollar are growing as it appears the Bank of England might find itself in a position to cut interest rates ahead of the Federal Reserve.
"The pound has weakened across the board. Sterling had climbed higher against most peers yesterday following the UK jobs report, which showed wage growth slowed by less than forecast, and the unemployment rate unexpectedly dropped to 3.8% versus the 4% expected. However, the softer inflation numbers will likely help pave the way for more rate cuts by the BoE, diminishing the pound’s yield advantage," says George Vessey, Lead FX Strategist at Convera.
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