The Pound Sterling (GBP) experienced a significant sell-off against major currencies during Wednesday’s London trading session, following the release of weaker-than-expected Consumer Price Index (CPI) data for July. The report from the UK Office for National Statistics (ONS) has heightened expectations of potential interest rate cuts by the Bank of England (BoE).
The annual headline CPI rose by 2.2%, falling short of the anticipated 2.3% and accelerating from the 2% recorded in May and June. The BoE had previously warned of potential increases in headline inflation after reaching its 2% target. On a month-to-month basis, CPI decreased by 0.2%.
Core CPI, which excludes volatile items like food and energy, decelerated more than expected to 3.3%, compared to the forecast of 3.4% and June’s 3.5%. This decline was driven by a slowdown in service sector inflation, which fell to 5.2% from 5.7%. The deceleration in core inflation reflects slower wage growth, with the Average Earnings Excluding Bonuses rising by 5.4% in the three months ending June, down from 5.7% in the previous quarter. This decrease in wage pressures may ease concerns for BoE policymakers about persistent inflation.
BoE Monetary Policy Committee (MPC) member Catherine Mann had previously warned of ongoing inflationary pressures, noting that both goods and services prices were expected to rise again and wage pressures might persist for years.
In the currency markets, the Pound Sterling dropped to around 1.2820 against the US Dollar (USD) during Wednesday’s European trading hours. This decline came in response to the UK’s soft inflation report. Meanwhile, the outlook for the USD remains uncertain ahead of the US CPI data for July, scheduled for release at 12:30 GMT.
The US Dollar Index (DXY), which measures the Greenback against six major currencies, edged up to approximately 102.67 after falling to a weekly low of 102.55 on Tuesday. Expectations for US annual headline and core inflation are for a slight deceleration to 2.9% and 3.2%, respectively, with monthly increases of 0.2%.
The US Dollar saw a sharp sell-off on Tuesday following a softer Producer Price Index (PPI) report for July, which fueled speculation about more aggressive interest rate cuts by the Federal Reserve (Fed). The CME FedWatch tool indicates a 54.5% chance of a 50 basis points rate cut in September, a slight increase from the previous week’s 69% but still below earlier expectations.
The PPI report showed headline producer inflation at 2.2%, below the forecast of 2.3% and June’s 2.7%, while core PPI grew at a slower pace of 2.4% compared to expectations of 2.7% and the prior reading of 3%. This decline in producer pricing power has bolstered investor confidence that inflation is moving towards the Fed’s 2% target.
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