Pound Sterling Tumbles as Inflation Falls

• UK inflation eases more than expected
• British pound tumbles close to 1%

Pound slides as UK inflation lower than expected

The British pound is sharply lower on Wednesday. In the European session, GBP/USD is trading at 1.2916, down 0.92%. The pound’s fall was driven by Wednesday’s UK inflation report, which showed that CPI fell to 7.9% in June, down from 8.7% in May. This marked the lowest inflation level since February 2022. The decline was driven by lower prices for food and motor fuel. Core CPI declined slightly, from 7.1% to 6.9%.

Investors gave the positive inflation two thumbs up, with the markets now expecting the cash rate to peak around 6%, compared to 6.5% earlier in July. The markets have revised lower expectations for a 0.50% hike from the BoE in August to about one in two – prior to the inflation report, a 0.50% increase was almost fully priced in. Also, the yield on two-year gilts fell more than 20 basis points to 4.86% after the inflation report.

The Bank of England has a rough time with inflation, which remains high despite the BoE’s aggressive tightening cycle. The BoE desperately needed a positive inflation report and will also be encouraged by services inflation, a key gauge of domestic inflation, which fell to 7.2% in June, down from 7.4% in May.

Inflation is moving in the right direction, albeit slowly. The BoE’s target of 2% remains far away and core inflation has been persistently high. The BoE will likely need to continue raising rates in the coming months in order to bring inflation closer to target. The UK boasts the record for the highest inflation rate in the G-7 and the government has set its sights on pushing inflation lower to 5%.

GBP/USD Daily Chart

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