FX round-up: Pound falls as inflation unexpectedly slows

The pound fell against the euro and the dollar on Tuesday as it emerged that UK inflation unexpectedly slowed last month, easing pressure on the Bank of England to hike interest rates

Earlier on in the session, sterling was trading above 1.31 against the dollar as traders bet that inflation would come in higher than expected. However, sterling was knocked lower after data from the Office for National Statistics revealed the consumer price index was 2.6% higher in June than the same month last year, softening from the 2.9% rate in May. Most economists had expected the headline rate of CPI to remain roughly the same or at least only shrink to 2.8%, although the number was in line with the Bank of England’s latest forecast.

At 1500 BST, the pound was down 0.3% against the dollar at 1.3023 and a whopping 1.1% weaker versus the euro at 1.1251. The pound probably would have fallen further against the greenback, had it not been for the US currency's own weakness.

The dollar had fallen late on Monday and the dollar index was at 10-month lows after President Trump's healthcare bill failed to get congressional approval again, casting further doubt on his ability to get any of his policies through.

FXTM research analyst Lukman Otunuga said the fact that sterling sharply depreciated across the board after the inflation data continues to highlight how the currency has become increasingly sensitive to monetary policy speculation.

"Price action suggests that those who were heavily reliant on the possibility that higher rates would support Sterling further were left empty-handed, as deceleration in inflation eroded expectations of a UK rate increase in 2017. Although the Bank of England has adopted a hawkish tone in recent weeks, today’s fall in inflation is likely to ease pressure on the Bank of England taking action, consequently keeping hawks at bay."

Meanwhile, Spreadex analyst Connor Campbell said: "With the Bank of England split on interest rates, this CPI retreat may shift a few undecided MPC members to the dovish end of the spectrum - after all, if they wouldn’t hike at 2.9%, why would they act on 2.6%? At the very least the dip in inflation kicks the issue down the road, the central bank able to wait out the early August meeting to see whether the fall was an anomaly or the start of a more long term trend. Either way sterling quickly soured after the figure was released."

Neil Wilson at ETX Capital said although an August rate hike now looks highly unlikely, we should remember that the BoE has only limited tolerance for continued above-target inflation and may yet seek to push rates back up to 0.5% this year, if conditions in the wider economy improve whilst inflation remains above 2%.

"With pressures on consumers, slacker inflation is a good sign for aggregate demand so this may yet support conditions for a rate hike."