Pound Slides to a 10-Month Low as Inflation Undershoots Forecast

(Bloomberg) -- The pound tumbled to its weakest level in 10 months as U.K. inflation unexpectedly held steady, making investors more cautious on the case for an imminent rate increase.

Gilts rallied after consumer prices rose 2.4 percent in June from a year earlier, less than the median forecast for 2.6 percent in a Bloomberg survey. The reading spurred traders to slash bets for an increase in the Bank of England’s benchmark rate, with investors now seeing a 74 percent chance of a move from 83 percent before the data.

The U.K. currency has been caught in a tussle between expectations that the central bank will tighten and political turmoil that has surrounded Prime Minister Theresa May’s government.

“Even though today’s data is probably not weak enough to prevent the BOE from hiking it is likely to keep investors cautious, and that could keep sterling downside risks intact,” said Manuel Oliveri, a strategist at Credit Agricole CIB. “It could fuel expectations that August is not a done deal, especially as the political outlook is still clouded.”

The pound fell as much as 0.8 percent to $1.3115, the lowest since September 2017. It weakened 0.3 percent to 89.19 pence per euro. The yield on U.K. 10-year government bonds fell three basis points to 1.23 percent.

Political risks could come back into focus later Wednesday as May faces weekly questions in the Commons. This will be followed by the resignation speech of former Foreign Secretary Boris Johnson, who quit last week over May’s Brexit strategy.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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