Sterling weighed down as shares rose, UK inflation eased

  • Sterling falls, euro strong after surprise fall in UK inflation
  • The UK FTSE 250 is heading for its best trading day since early February
  • Government bonds are rallying on hopes that the central bank will keep interest rates on hold
  • MSCI World Share Index ends eight-day winning streak

LONDON, SYDNEY, July 19 (Reuters) – Global shares and government bonds rallied on Wednesday as good news on UK inflation added to a picture of cooling price pressures, although the data hit the brakes on sterling’s recent winning streak.

British consumer price inflation eased to 7.9% year-on-year in June, against expectations of 8.2%, in the latest negative surprise from a major economy after more than 18 months of central banks raising interest rates.

Later in the day, the final Eurozone inflation data for June confirmed that the annual rate of price increase in the region had slowed to 5.5%.

The trend is the “backward effects of higher rates and tighter monetary policy coming home,” said Eren Osman, managing director of wealth management at Arbuthnot Latham.

Sterling lost 0.8% to trade at $1.2961 on market bets that the Bank of England will raise interest rates to 6% from the current 5%. Against the euro, the pound fell 0.8% to 86.1 pence.

The BoE now has the “green light” for a 25 basis point (bps) rate hike next month, Pantheon Macroeconomics chief UK economist Samuel Tombs said, after markets had previously priced in a further 50-bps hike.

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Sterling is still showing a 4% gain over the past three months, buoyed by speculation that the US Federal Reserve will end its rate hikes before the Bank of England.

Kenneth Brooks, head of FX and rates corporate research at Société Générale in London, said: “It’s not surprising to see gains in sterling.

Signs of inflation in the UK raised hopes that global price rises could ease more rapidly than economists had predicted in 2021.

UK indices performed well. London’s blue-chip FTSE 100 (.FTSE) added 1.5% and the domestically focused FTSE 250 (.FTMC) rose 2.7%, on track for its best daily performance since Feb. 2.

In bond markets, the yield on the two-year UK gilt, which tracks interest rate expectations and moves inversely to the price of government debt securities, fell 27 bps to 4.811%, its biggest drop since mid-March.

Germany’s two-year bond yield fell 6 bps to 3.189%. The 10-year yield, a benchmark for borrowing costs in the euro zone, fell 4 bps to 2.35%.

Eurozone bonds benefited from comments by European Central Bank (ECB) Governing Council member Klaus Knott on Tuesday that rate hikes beyond next week’s meeting were “by no means certain”.

“This is the first time that a known hawk within the ECB has supported the market’s view that we are nearing the end of the hiking cycle in Europe,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

Wall Street appeared poised for a quieter session after U.S. consumer data on Tuesday indicated the economy was slowing but may have avoided a recession in the second quarter of the year.

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The benchmark 10-year US Treasuries yield fell 3 basis points to 3.789%.

Futures trading indicated that the S&P 500 and Nasdaq 100 stock indexes were flat at the market open.

The yen fell to a one-week low of 139.43 per dollar and Japanese government bonds rallied after the Bank of Japan’s governor stuck to his script saying policy changes are still some time away.

Asian stock markets were mixed on Wednesday as stocks in Japan and Australia rose, with economic growth worries dragging down China shares.

Editing by Sam Holmes, Bernadette Baum and Kim Coghill

Our Standards: Thomson Reuters Trust Principles.

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