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Sterling skids to two-week trough as UK inflation slows down
Sterling tumbled in European trade on Wednesday to two-week lows against the dollar, resuming losses after a two-day hiatus as inflation slowed down in February, boosting the odds of a May Bank of England interest rate cut.
Now investors await the reveal of the UK government budget for 2025, which could include fiscal stimulus to support higher consumption, in turn boosting both growth and inflation.
The Price
The GBP/USD pair fell 0.45% today to $1.2886, the lowest since March 11, with a session-high at $1.2949.
The pound rose 0.1% on Tuesday against the dollar, as the risk appetite rebounded in the markets.
UK Inflation
UK consumer prices rose 2.8% y/y in February, below estimates of 3.0%, and down from 3% in the previous reading.
Core prices rose 3.5%, below estimates of a 3.6% rise, and down from 3.7% in the previous reading.
The data shows that inflationary pressures are reducing on BOE policymakers, which is a welcome economic sign.
UK Rates
Following the data, the odds of a BOE 0.25% interest rate cut in May surged to 80%.
Later today, the UK finance minister Rachel Reeves is scheduled to reveal the details of the government budget for 2025, which would include the levels of expected spending, income, borrowing, and financial targets and investments.
Yen resumes losses after Ueda's statements
The Japanese yen fell on Wednesday in European trade against a basket of major rivals, and resumed its losses against the dollar after a short hiatus yesterday, and almost touched three-week lows following remarks by Bank of Japan Governor Kazuo Ueda.
Earlier Tokyo data showed Japanese services prices slowed down in February, indicating a slowdown in inflationary pressures on policymakers, and hurting the odds of a May rate hike.
The Price
The USD/JPY pair rose 0.4% today to 150.44 yen per dollar, with a session-low at 149.84.
The yen rose 0.55% yesterday against the dollar, the first profit in four days away from three-week lows at 150.94.
Ueda
Bank of Japan Governor Kazuo Ueda said ahead of the Diet that the BOJ should hike interest rates if food prices continue to rise and lead to wide-spread national inflation.
He said that recent “very high inflation” in Japan is likely prompted by transient factors, such as higher import and good costs, which will likely dissipate and shouldn’t impact monetary policies.
He said the important factors to consider here are sustained wage growth, which started with big corporations and should be analyzed to see if it spreads to smaller companies.
Services Prices
Japanese services prices rose 3.0% in February, down from 3.2% in January, and below estimates of 3.1%.
Slower services prices indicate that inflation is tapering off, which reduces the odds of interest rate hikes.
Japanese Rates
Following the data, the odds of a Bank of Japan 0.25% rate hike in May fell to 40%, with investors now waiting for more inflation, unemployment, and wages data from Japan to gather more clues.
A Reuters survey showed analysts expect the next interest rate hike by the BOJ to occur in the third quarter, likely in July.
