Sterling had another down day, slipping a further 0.3% in trade-weighted terms to a 19-week low, with GBP/USD down to within touching distance of 1.30 (the low since early September 2017). The catalyst was weaker-than-expected CPI-inflation for June, with headline unchanged at 2.4% yoy for the third consecutive month (versus 2.6% yoy expected), while core inflation fell to a 16-month low of 1.9% yoy from 2.1% yoy in May (2.2% expected). Sterling is no longer disinflationary and demand-pull inflation remains soft due in part to stagnant real wages and muted consumer demand, which is countering higher international commodity prices.
This may throw a spanner in the works for a Bank of England which in recent weeks had seemingly been inching towards a 25bp hike at its 2nd August policy meeting. GDP growth recovered in April-May and Governor Carney had sounded hawkish in recent speeches. But UK inflation is going nowhere fast and it still remains unclear what Brexit deal the UK government will be able and willing to secure and how such a deal could impact the UK economy in coming quarters.
This arguably leaves the Bank of England in an award position with its policy meeting now only a fortnight away. GBP/USD did eventually recover to 1.3063 but the cross remains near multi-month lows and markets are increasingly less in the mood to give the UK economy and its government the benefit of the doubt.
