Pound Falls Even as Inflation Rates Beat Economists’ Forecasts

The pound fell even as a report showed the UK’s annual inflation rate rose more in June than economists forecast.

Sterling weakened versus most of its 16 major peers. UK consumer prices climbed 0.5 per cent last month from a year earlier, the Office for National Statistics said in London. Analysts had expected the rate to rise to 0.4 per cent, from 0.3 per cent in May, according to the median estimate in a survey by news agency Bloomberg. The Bank of England’s 2 per cent inflation target was last reached in December 2013.

The Bank of England signalled last week it is readying stimulus for August as the economy reels from Britain’s decision to quit the European Union. Minutes of the BOE’s July meeting showed most members of the Monetary Policy Committee expect policy to be loosened next month.

Futures contracts indicate an 82 per cent chance of a cut in August, compared with 14 per cent on June 23, the day of the EU referendum. BOE officials led by Governor Mark Carney are scheduled to announce their next decision on August 4.

‘Modest pound pull-back’

“We’ve seen a modest pound pullback. Higher inflationary pressures ahead have to be set against slower growth, which is hardly a great backdrop,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London (CIBC).

The pound fell 0.4 per cent to $1.3202 as of 10.15am London time on Tuesday, July 19. It dropped to a 31-year low of $1.2798 on July 6. The currency weakened 0.4 per cent to 83.85 pence per euro.

Worst Performer

Sterling climbed to a two-week high of $1.3481 on July 15, a day after the BOE unexpectedly left rates unchanged. Even so, it is still the worst-performing Group-of-10 currency in the past month.

Reports due this week, including the first post-referendum surveys tracking output among the services and manufacturing industries, as measured by purchasing managers, could add pressure to the pound, according to CIBC’s Stretch.

“I suspect that we will move lower this week as real economy data will be subdued, while the one-off flash PMI on Friday risks revealing the scale of the post-Brexit deceleration. These reports are likely to “set the tone” into the BOE’s decision in August,” he said.

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