Sterling Falls on Lower-Than-Expected Inflation, BoE Rate Cuts Expected

Sterling dipped on Wednesday following a softer-than-expected reading on British consumer price inflation. The pound fell 0.3% against the dollar and weakened against the euro. Lower-than-expected services price inflation fueled expectations for further interest rate cuts from the Bank of England this year. Traders now anticipate rate cuts totaling 46 basis points.

Sterling dipped on Wednesday after a softer-than-expected reading on British consumer price inflation supported expectations of further interest rate cuts from the Bank of England (BoE) this year.

The pound fell 0.3% to $1.2827, marking its first decline in five sessions against the dollar. It also weakened against the euro, with euro/sterling trading up 0.3% at 85.69 pence. Consumer price inflation rose to 2.2% in July after two months at the BoE's 2% target, but fell short of economists' forecast for an annual rise to 2.3%.

Services price inflation fell to 5.2% in July from June's 5.7%, below the Reuters poll forecast of 5.5% and the lowest since June 2022. "The Bank of England will breathe a huge sigh of relief this morning, having seen services inflation come lower," said Kyle Chapman, FX markets analyst at Ballinger Group.

Money markets show traders are currently pricing in rate cuts of about 46 basis points from the BoE this year, little changed from Tuesday's level. The odds of a September rate cut stand at about 48%. "Given that we got mixed signals from the jobs report yesterday and there is one more inflation report to go before the September meeting, the next decision is wide open. That said, I expect the Bank to pause at the next meeting and wait for more data before proceeding in November and likely December," Chapman added.

The BoE cut rates from a 16-year high earlier this month after a tight vote by its policymakers, who were split over whether inflation pressures had eased sufficiently. The pound had touched a two-week high on Tuesday after figures showed the UK jobless rate dropped to 4.2% in June, defying expectations for a small rise.

(With inputs from agencies.)