June 13, 2018 / 8:14 AM / 5 days ago

Sterling at one-week lows as inflation below forecasts

LONDON (Reuters) - Sterling slipped to a one-week low on Wednesday as inflation data failed to bolster chances of an interest rate increase in August with markets wary about headlines on Brexit negotiations.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration

Consumer price inflation held at an annual rate of 2.4 percent in May, its joint-lowest since March 2017, the Office for National Statistics said on Wednesday, below economists’ forecasts in a Reuters poll of a small rise to 2.5 percent.

The data did little to shake market expectations of an interest rate hike over the course of the year.

Money markets currently price in a 43 percent chance of a 25 basis point hike in August and barely one rate hike by end-2018.

The British currency fell back towards the day’s lows at $1.3322, its lowest levels since June 5 and down 0.4 percent on the day.

Since popping to an overnight high of $1.3424 after Prime Minister Theresa May saw off a rebellion in parliament over amendments to a bill for the country’s exit from the European Union next year, sterling weakened nearly 1 percent.

“I think mkts are currently interpreting the likelihood of a total breakdown in negotiations and a WTO-style hard exit as a lower probability than has been thought at various points in the past,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

“The true nature of UK’s relationship with the EU is still up for debate,” he said.

MUFG and other market analysts interpreted the outcome as a sign that political pressure will remain in place to soften the Brexit divorce, but the data and a U.S. Federal Reserve policy meeting kept investors on the sidelines.

“There is plenty of event risk out there today with the UK data and the U.S. policy decision so markets are happy to play the ranges,” said a sales trader at a U.S. bank in London.

Against the euro, sterling was trading 0.2 percent weaker at 87.99 pence.

Risk reversals for sterling, a gauge of demand for options on a currency rising or falling, have risen from recent lows indicating a pick up in demand for the British currency but remain far below January highs.

Reporting by Saikat Chatterjee; Editing by John Stonestreet and Andrew Heavens

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