Yahoo Finance Inflation fall drags sterling down
The pound sterling fell against the US dollar and Euro following the latest UK inflation data release
The pound sterling declined on Wednesday after data released showed inflation in the UK slowed to 7.9% in June, down from 8.7% the previous month.
Against the US dollar, the pound (GBPUSD=X) fell to 1.29, meaning £1 will buy you $1.29. Against the euro, the pound also declined (GBPEUR=X), to 1.15 – so £1 buys €1.15.
Despite the inflation figure marking the lowest level in more than a year, it is still almost four times higher than the Bank of England's 2% target.
Read more: UK inflation falls to 15-month low of 7.9% as price rises slow
Giles Coghlan, chief market analyst, consulting for HYCM, said: “Bank of England policymakers will still be setting the scene for at least a 25bps rate hike on 3 August after today’s inflation reading. As the headline figure was stagnant at 8.7% throughout both April and May, today’s modest decline to 7.9% may signal to investors that economic pressures are gradually easing.
“The drop was below economist's minimum expectations, so that is some temporary relief to red hot rates markets. However, core inflation continues to be a thorn in the central bank’s side at 6.9%, highlighting the risk that domestic inflationary pressures are here to stay for now,” he said.
More downward pressure for the pound?
Coghlan also shared his thoughts on how the latest inflation reading could further impact the pound.
“As stagflation fears loom larger, the GBP may face downwards pressure from that quarter too [Q3 – July, August & September]. The persistence and increasing severity of UK inflation could amplify worries about the country’s economic health on the world’s stage, potentially leading to a protracted decline in the GBP’s value.
“For now, the Bank of England will breathe a sigh of relief that at least inflation prints are heading in the right direction. Next month's figures should also fall sharply as that data set will reflect the drop in energy prices the UK experienced in July,” he added.
Lower inflation should, theoretically, cause a currency to strengthen, as it is high inflation that reduces the value of a currency. Whilst the UK inflation data is lower, it is still high compared to other countries.
Moreover, interest rate hikes tend to strengthen a currency. Therefore a lower inflation decreases the possibility of more central bank interest rate hikes which also weaken a currency.
Read more: UK interest rates to rise less sharply as inflation drops more than expected
All of these fundamental factors are playing into the price of the pound today but of course no previous trading pattern is a guarantee of what may happen with a currency pair in the future.
And as Piero Cingari, an independent macro analyst, recently pointed out to Yahoo Finance UK, the fundamentals impacting the other currency the pound is paired with must also be considered.
"The value currency is always related to another. So EUR/USD, GBP/USD, etc. The relative strength of one versus the other is a tug-of-war between central banks willing to hike interest rates. Inflation is what could make a central bank more or less hawkish,” he said.
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