Investing.com — Sterling steadied on Wednesday after British inflation cooled more sharply than expected in April, undercutting the case for aggressive Bank of England tightening and capping any recovery against a broadly firmer dollar.
As of 08:03 ET (12:03 GMT), edged up 0.06% to 1.3403, hugging the lower end of its daily range of 1.3375-1.3422, while slipped 0.01% to 1.1603 as the greenback retained its composure.
The Office for National Statistics reported headline CPI at 2.8% in April, down from 3.3% in March and beneath the 3% consensus, driven by the Ofgem energy price cap introduced on April 1 alongside smaller-than-expected rises in water, sewage, and road tax bills.
Food prices and package holidays added further disinflationary drag. ONS chief economist Grant Fitzner noted the fall reflected wholesale energy levels prior to the Middle East conflict, only partially offset by rising petrol and diesel costs and a tick higher in clothing and footwear.
ING cautioned the softer print, stacked on top of Tuesday’s weak labour market data, calls into question the case for aggressive tightening.
The broker now sees a June hike as a close 50:50 call but narrowly retains it as its base case, trimming its bearishness amid the ongoing political uncertainty.
Francesco Pesole flagged the disinflationary impulse as likely temporary, with UK CPI expected to peak just shy of 4% later in the year as the Iran war’s impact on oil prices filters through.
Money markets reflected the recalibration, with traders pricing just over 50 basis points of BoE tightening by December, down from around 60 basis points on Tuesday. A July hike to 4% remains the central expectation, but conviction has softened materially.
The political backdrop added a persistent drag. yields have climbed sharply over the past two weeks as markets price in both BoE hikes and the prospect of Prime Minister Keir Starmer’s exit, with investors wary that a more fiscally expansive successor could widen the UK’s borrowing requirement.
Chancellor Rachel Reeves moved to steady nerves, with the Treasury announcing sweeping energy reforms to give parliament authority over critical infrastructure approvals.
Dollar resilience completed the squeeze on sterling, with the greenback drawing continued support from elevated and lingering safe-haven demand tied to the Iran conflict, leaving GBP/USD anchored within striking distance of Friday’s near six-week low of 1.3304.