The pound edged higher on Wednesday as investor nervousness over the escalating conflict in the Middle East weighed on the dollar and after UK data showed consumer inflation barely moved in May, undermining the case for prompt rate cuts.
The Office for National Statistics said on Wednesday that consumer prices rose in annual terms by 3.4% in May, in line with forecasts and down from April’s 3.5% rate.
May’s decline was the result of a drop in airfares, which leapt in April and the correction of a tax data error, while food prices shot up at the fastest rate in more than a year.
Sterling was last up 0.26% at $1.3462 having edged higher from around $1.3443 before the data.
The pound fell 1.09% against the dollar on Tuesday, its largest one-day decline since early April, as fighting between Israel and Iran raged for a fifth day, while the U.S. military moved fighter jets to the region. The increasing intensity of the conflict ignited a fresh wave of risk aversion among investors that drew flows into the U.S. currency.
By Wednesday, the pound had recovered some of these losses, as investors briefly shifted their focus to the outlook for UK monetary policy.
“Consumer price inflation hasn’t budged in the UK, coming in at 3.4% for May. This was expected and although this is a slightly better scenario than another ramp up in price increases, it’s unlikely to persuade more decision makers to vote for a rate cut tomorrow,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
One element that could give Bank of England policymakers, who will publish their decision on borrowing costs on Thursday, some comfort was a decline in the rate of service sector inflation.
Services price inflation – a crucial metric for the BoE – cooled to 4.7% from 5.4% in April, matching the BoE’s forecast for May. A Reuters poll had pointed to a reading of 4.8%.
Money markets show traders do not expect the BoE to cut UK rates until at least September, with the possibility of one more quarter-point cut by December.
(Reporting by Amanda Cooper)
