Sterling steady ahead of expected drop in inflation

By Harry Robertson

LONDON (Reuters) – The pound held steady on Monday as markets waited for April inflation data later in the week which is expected to show the rate of UK price rises falling back to the Bank of England’s target.

Sterling was unchanged from Friday’s closing price at $1.2704. The pound has risen around 2% so far this month as the U.S. dollar has fallen on the back of weak growth and inflation figures, while British data has been stronger than expected.

Data on Wednesday is expected to show that the UK’s headline rate of inflation fell to 2.1% in April, down sharply from 3.2% in March, thanks mostly to a fall in the cap on household energy bills.

Inflation peaked at 11.1% in October 2022 but has dropped in recent months, reflecting lower energy prices and a slowdown in food inflation.

“Wednesday’s CPI (consumer price index) print in the UK will be a pivotal moment for the pound,” said Francesco Pesole, FX strategist at ING.

“Our economics team thinks that services inflation will come slightly hotter than the BoE’s forecast, which should tilt the balance in favour of August for the first cut.”

Markets currently expect the Bank of England, which has a 2% inflation target, to cut interest rates twice this year, most likely starting in August. Pricing in derivatives markets suggest traders see a 55% chance of the first cut coming in June.

Bank of England Deputy Governor Ben Broadbent said on Monday it was “possible” that an interest rate cut will take place in the next few months, potentially “some time over the summer”.

The euro was flat against the pound at 85.55 pence, having traded at around that level for a month.

Also of interest this week is survey-based economic data for Britain, due out on Thursday, which is expected to show that growth continued in May.

(Reporting by Harry Robertson; Editing by Susan Fenton)