Sterling was little changed against the dollar as Britain’s inflation easing strengthened the case for short-term interest rate cuts by the Bank of England, although underlying price pressures remained strong.
Annual consumer prices rose 3% last month, slowing from 3.4% in December, official figures showed. Most economists surveyed by Reuters expected headline inflation to fall to 3% in January.
However, the services inflation rate, which is closely watched as an indicator of domestic price pressure, slowed only slightly to 4.4% from 4.5% in December, exceeding the 4.3% decline expected in a Reuters poll.
Following this figure, the pound was flat at $1.3566. It fell 0.5% on Tuesday as weak labor market data fueled expectations for a rate cut.
Chris Turner, global head of research at ING, said: “Most people sold the pound pretty hard yesterday and thought there would be a bit of a pullback today with inflation slowing, but it wasn’t a full-on decline.”
Mr Turner added: “The services CPI was a bit higher than expected so I think the pound got a bit of a reprieve on that.”
Investors now believe there is about an 85% chance that the central bank will cut interest rates by 25 basis points next month, up slightly from Tuesday. Money market traders are fully pricing in two quarter-point rate cuts by the end of the year.
turn to politics
Britain’s unstable political situation has become a focus for pound traders.
Prime Minister Keir Starmer last week dismissed calls for Peter Mandelson to resign from his centre-left Labor Party over his appointment as ambassador to Washington.
A by-election scheduled for next week in Greater Manchester in northwest England could reignite doubts about Starmer’s leadership if Labor loses a seat it won with more than 50% of the vote in the 2024 national election.
ING’s Turner said: “Labour’s big losses will put Starmer back in the spotlight and put the pound and the Bank of England under a bit more pressure.”
The pound rose 0.2% against the euro to 87.2 pence.
(Reporting by Samuel Indyk; Editing by Gareth Jones)
