LONDON (Reuters) - The pound edged higher on Wednesday after inflation picked up in July, but the currency held within sight of a two-and-a-half year low as brewing concerns about a no-deal Brexit weighed on investor sentiment.
The consumer price index rose 2.1% year-on-year in July from 2% in June, above a Reuters poll forecast of a 1.9% increase. The Bank of England’s inflation target is 2%.
“Stronger than expected UK CPI inflation data this morning has a modest impact on the short end of the curve,” said Jane Foley, senior forex strategist at Rabobank.
“The move, however, has not been sufficient to distract attention from the pressure that has been exhibited on the longer end of the curve,” Foley said, referring to signs of a global recession and the risk of Britain crashing out of the European Union without a transition deal in place.
The U.S. Treasury yield curve inverted for the first time since 2007 on Wednesday. A curve inversion - when short-dated bond yields are higher more than their longer-dated counterparts - is seen as a reliable warning for an impending recession.
The drop in bond yields sent a chill through global markets.
Against the dollar GBP=D3, the pound was up 0.1% at $1.2074, above a low of $1.2015 hit on Monday, its weakest since January 2017. Versus the euro EURGBP=D3, the British currency was ahead slightly at 92.615 pence.
Higher inflation would normally translate into higher interest rates, and therefore a stronger currency. But with the potential for a no-deal Brexit rising as the Oct. 31 deadline approaches, the central bank is likely to remain in a wait-and-see mode until there is clarity, analysts say.
Presently, money markets price in an interest rate cut by the Bank of England before May 2020.
Sentiment towards the pound has soured as some investors increasingly anticipate a no-deal Brexit while others are expecting increased political uncertainty in the coming months.
Prime Minister Boris Johnson, who took office last month, has pledged to leave the European Union on Oct. 31 with or without an agreement on the terms of Britain’s departure. The EU has said it will not renegotiate an accord reached by his predecessor Theresa May but rejected by the British parliament.
Reporting by Saikat Chatterjee and Olga Cotaga; Editing by Mark Heinrich