British Pound Faces Inflation Blues, Set for Sharp Weekly Drop

The British pound has faced a challenging week, continuing its downward slide against major currencies like the euro and the dollar. The primary cause of this decline is the UK’s cooling inflation, which has caused market participants to temper their expectations of further aggressive rate hikes from the Bank of England (BoE).

Against the euro, sterling saw a dip of 0.48%, falling to 86.98 pence, edging closer to the two-month low it reached just the day before. Simultaneously, the pound experienced a 0.72% drop against the dollar, with the exchange rate standing at 1.2848. This marks the fifth consecutive day of decline against the greenback, following a 0.74% drop on the previous day.

Meanwhile, data released on Wednesday revealed that the UK’s annual consumer price inflation fell to a much lower-than-expected 7.9% in June, a notable drop from May’s 8.7%. Economists surveyed by Reuters had anticipated a CPI rate of 8.2% for the same period.

source: tradingeconomics.com

The unexpected cooling in inflation has prompted the money markets to recalibrate their expectations for future BoE rate hikes. As a result, the likelihood of UK rates surpassing the 6% threshold now appears to be off the table.

Expert’s Opinion on the Fate of the Pound

Jeremy Stretch, the head of G10 FX strategy at CIBC Capital Markets, offers his insights on the situation, as reported by Reuters. He predicts that rates are now expected to remain below 5.75%, a considerable shift from the assumptions made just two weeks ago, when rates were expected to exceed 6.50%. Despite this change, Stretch believes that ongoing rate support will provide some stability for the British pound.

Even with the recent cooling, the UK retains the unfortunate distinction of having the highest inflation rate among the G7 nations. Comparatively, the United States is experiencing headline consumer price pressures at a rate of just 3%, and the euro zone’s inflation hovers at 5%.

Future Outlook for Sterling

Despite the recent drop, experts remain cautiously optimistic about the future outlook for the pound. While it has experienced a challenging week, many anticipate that sterling will likely stabilize above the lows witnessed earlier.