Sterling heads for biggest weekly fall since February as inflation cools

London, July 22 (BNA): The British pound was on track to post its biggest weekly decline since February on Friday, as markets responded decisively to signs that Britain may finally turn the page on inflation.

According to Reuters, the pound fell 0.1% to $1.286 at 0912 GMT, putting it on track for a weekly decline of 1.74%.

It rose after data showed retail sales rose more than economists expected in June, but then eased as the dollar strengthened.

The greenback’s rise came on the back of a Reuters report that the Bank of Japan is leaning towards maintaining its ultra-loose monetary policy next week.

The euro remained unchanged at 86.49 pence, and was heading for a weekly gain of 0.86% against the pound.

Sterling has risen sharply this year as the British economy has held up better than expected, keeping inflationary pressures strong and the Bank of England on track to raise interest rates.

However, data on Wednesday showed that inflation fell more-than-expected in June to 7.9%, down sharply from 8.7% in May.

This caused traders to reduce their bets on a BoE rate hike. According to derivatives pricing, the market now believes UK interest rates will peak at around 5.85%, down from forecasts of around 6.5% earlier this month. The bank rate is currently 5%.

“The recent significant rally in sterling has been driven by anticipation of further interest rate increases from the Bank of England, and the (inflationary) issuance may challenge the need for such a committed policy hawk,” said Joe Tukey, head of FX analysis at Argentex brokerage Joe Tukey.

Separate data on Friday showed that rising interest rates and soaring inflation caused British consumer confidence to decline last month at the fastest rate since April 2022.

Dominic Banning, head of European forex research at HSBC, said this week that the drop in sterling “must continue further”.

“The inflation reading is likely to make it difficult for the Bank of England to get ahead of a rally as strong as market rates are, especially as broader activity data has started to disappoint over the past month.”

The ruling Conservatives led by British Prime Minister Rishi Sunak lost two strategically important parliamentary seats on Friday, but unexpectedly held the old constituency of his predecessor Boris Johnson, although the results had little impact on currency markets.

The dollar index – which tracks the currency against six peers – rose 0.24% to 101.01, with the dollar gaining 1.25% against the Japanese yen.

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