Sterling found a tentative foothold on Wednesday after UK consumer price inflation eased more sharply than forecasters had expected in April, reducing market appetite for an aggressive tightening campaign from the Bank of England and limiting any meaningful rebound against a broadly firmer US dollar.
As of 08:03 ET (12:03 GMT), the GBP/USD exchange rate inched up 0.06% to 1.3403, trading near the lower end of its day range of 1.3375 to 1.3422. At the same time, EUR/USD slipped 0.01% to 1.1603 as the dollar maintained its recent strength.
The Office for National Statistics reported that headline consumer price inflation slowed to 2.8% in April from 3.3% in March, coming in below a consensus of 3.0%. The ONS attributed the moderation in part to the Ofgem energy price cap that came into effect on April 1, together with smaller-than-expected increases in water and sewage charges and road tax bills.
Additional downward pressure on inflation came from softer food price inflation and weaker package holiday costs. ONS chief economist Grant Fitzner said the decline in the inflation rate reflected lower wholesale energy prices that predated the Middle East conflict, and that these effects were only partially offset by rising petrol and diesel prices and a small uptick in clothing and footwear costs.
Market participants and analysts reacted to the data by reassessing the likely path for UK monetary policy. ING said the softer inflation print, combined with weak labour market data released the previous day, undermines the case for aggressive BoE tightening. The broker described a June rate rise as about a 50:50 proposition but retained it as its base case, while easing its bearish stance on EUR/GBP amid ongoing political uncertainty.
Francesco Pesole at ING cautioned that the current disinflationary impulse may be temporary. He noted that UK CPI could be expected to peak just under 4% later in the year as the consequences of the Iran war on oil prices filter through to the economy.
Money markets adjusted their expectations after the data, with traders now pricing slightly more than 50 basis points of total Bank of England tightening by December, down from roughly 60 basis points earlier in the week. Although a July policy rate of around 4% remains the central market expectation, traders' conviction in that outlook has diminished materially.
Political developments have continued to exert pressure on UK assets. Gilt yields have climbed markedly over the past two weeks as markets factor in both the prospect of further BoE hikes and the potential departure of Prime Minister Keir Starmer, with investors concerned that a successor adopting a more fiscally expansive stance could raise the government's borrowing needs.
Chancellor Rachel Reeves sought to calm markets by unveiling broad energy reforms intended to give parliament greater oversight over approvals for critical infrastructure projects.
The greenback's resilience rounded out the factors constraining sterling. Elevated US Treasury yields and persistent safe-haven demand related to the Iran conflict provided ongoing support for the dollar, helping to keep GBP/USD within reach of Friday's near six-week low of 1.3304.
Market snapshot
- GBP/USD: 1.3403, up 0.06% (intraday range 1.3375-1.3422)
- EUR/USD: 1.1603, down 0.01%
- UK CPI: 2.8% in April, down from 3.3% in March and below 3.0% consensus