Wednesday, 18 April 2018

Falling UK price data sends sterling to four-day low

LONDON (Reuters) - Sterling hit a four-day low on Wednesday after British inflation cooled unexpectedly, raising concerns that the Bank of England might not implement further increases to interest rates after next month’s expected hike.

A May increase to interest rates is already firmly baked into market expectations and a recent string of strong data and a Brexit transition agreement has prompted suggestion that the central bank will follow up with another increase in November.

Wednesday’s official data, however, showed annual consumer price inflation fell to 2.5 percent in March, down from 2.7 percent in February and below economists’ expectations, casting doubt over those bets.

“Sterling has fallen against the dollar, not because an imminent interest hike has been called into question – this now seems all but assured – but rather because today’s data casts doubt over the likelihood of a further rate hike in November,” said Jake Trask, a forex research director at OFX in London.

The British currency slid 0.8 percent to $1.4173 in London trading, its lowest since last Thursday and a striking reversal from Tuesday climb to $1.4377, its strongest since the Brexit referendum.

Growing bets of more rate increases have boosted sterling in recent weeks, taking it to the top of the league tables as the best-performing G10 currency with a 5 percent gain this year.

The Bank of England will raise its key interest rate to 0.75 percent in May, said nearly all of 76 economists polled by Reuters, with another 25 basis point rise expected just before Britain is due to leave the European Union early next year.

Against the euro, sterling weakened 0.6 percent to 86.45 pence.

Britain's internationally exposed FTSE 100 index, extended gains to a session high after the UK inflation data and was last up 0.7 percent.

British government bond prices surged after the data, pushing two-year yields down 6 basis points on the day to a two-week low of 0.830 percent, while 10-year yields  dropped by 5 basis points to 1.387 percent. December short sterling interest rate futures rose 4 ticks on the day to a four-week high.

Euro zone bond yields extended their falls after the UK inflation numbers as British gilt yields tumbled.

Reporting by Saikat Chatterjee

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