Sterling has fallen against the dollar this morning after UK inflation undershot expectations and traders’ nerves grew over Brexit.
The pound was 0.4 per cent lower against the dollar by 10.45am UK time to buy $1.245. Yet the fall was driven as much by dollar strength than sterling weakness, as traders reconsider how deep the US Federal Reserve will cut interest rates later today.
Inflation slowed to 1.7 per cent in August due in large part to falling computer game prices. Falling inflation boosts the chances of an interest rate cut, which makes a country’s currency less desirable.
Prime Minister Boris Johnson’s trip to Luxembourg on Monday to meet European Commission president Jean-Claude Juncker revealed few signs of compromise between the two sides, increasing traders’ worries about Brexit.
The pound has climbed 2.8 per cent over the last month, however, after MPs passed a bill to force the PM to request an extension of Britain’s membership of the EU.
“After reaching its highest level against the US dollar in 8 weeks yesterday, the pound has pulled back following a lower than expected inflation print,” said David Cheetham, chief market analyst at online trader XTB.
Howard Archer, chief economic adviser to the EY Item Club, said that if a no-deal Brexit came about, sterling would be “highly likely to weaken markedly”.
Today’s inflation data came a day before the Bank of England is due to set interest rates. A cut, although unlikely, would push down the value of sterling.
Archer said that fresh data is “unlikely to markedly influence the Bank of England’s thinking for now at least”.
The monetary policy committee (MPC) “is expected to remain firmly in ‘wait and see’ mode and deliver a 9-0 unanimous vote for keeping interest rates on hold at 0.75 per cent,” he said.
(Image credit: Getty)
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