Sterling fell against the dollar and euro after UK inflation data. CPI for the month of May fell 0.1 percent, which was more than the expected increase of 1.0 percent, and lower than April’s 0.6 percent rise. Meanwhile on a year-over-year basis CPI also came in much better than expected with a 2.8 percent print compared to expectations that it will remain unchanged at April’s 3.0 percent reading.
The RPI was weaker than expected with the year-on-year rate for May coming in at 3.1 percent compared to 3.3 percent expected.
The lower inflation numbers is considered positive news for the Bank of England, and gives them more room to expand QE if necessary. However this increase in the likelihood that the BoE might add to the GBP50 billion asset purchase program at its meeting in July resulted in a weakening of the British pound, because such measures usually weaken the currency.
BoE’s King signalled the prospect of QE last week when he said that “case for a further monetary easing is growing”. Especially as he also said that monetary easing and attempts to lower bank funding costs can be done together.
GBPUSD fell to 1.5614 within 20 minutes of the news compared to where it was trading at 1.5648 just before the data at 08:30 GMT