Sterling falls as inflation data suggests Bank of England pause

Sterling suffered a sharp fall on Wednesday, slipping to a six-week low against the dollar as a stronger-than-expected slowdown in UK inflation eased pressure on the Bank of England to hike interest rates further.

The pound fell as much as 1.5 percent to $1.198, a level last seen in early January. The moves followed the release of data showing that UK inflation fell to a five-month low of 10.1 percent in January from 10.5 percent in the previous month. Economists polled by Reuters had forecast a drop to 10.3 percent.

The currency’s fall reflects a growing conviction among investors that the Bank of England is close to halting its monetary tightening cycle and comes as strong US economic data is fueling bets that the Federal Reserve may do more work has to curb inflation.

“There seems to be a gap opening up between what’s going on in the UK and the US,” said Jordan Rochester, FX Strategist at Nomura. “US inflation was running high, there’s no other way to put it, but the UK could be in a situation where inflation is coming down faster than expected as consumers cut spending.”

Contrary to the UK, US inflation was higher than expected in January, with consumer prices rising at an annual rate of 6.4 percent versus a forecast of 6.2 percent. The dollar strengthened as a result, while futures markets priced in a higher prime interest rate.

The world’s de facto reserve currency has slipped 8.8 percent over the past four and a half months but has so far rallied after a recent string of strong US economic data in February.

The BoE hiked rates by half a percentage point to 4% earlier this month, but hinted the hike could be its last.

According to analysts at MUFG, a combination of a “dovish shift in BoE policy guidance” and a “hawkish reassessment of Fed policy” has weighed on the pound.

Sterling’s decline helped London’s equity benchmark FTSE 100 to a new all-time high on Wednesday, touching 8,000 for the first time. The index, which is packed with multinational companies that generate a majority of their sales abroad, tends to benefit when the British currency weakens.

Sterling’s recent fall is still well above the all-time low of less than $1.04 it hit in September at the height of the gilt crisis, when former Prime Minister Liz Truss’ borrowing plans and a crisis in the bond sector eroded investor confidence in the UK .