(Bloomberg) — The pound weakened after British inflation slowed unexpectedly, easing pressure for further UK interest rate hikes and catching traders off guard as they prepare for a policy decision from the Federal Reserve.
Sterling fell as much as 0.5% against the dollar to its lowest level since May as traders bet that the Bank of England is nearing the end of its hiking cycle, with only more rate increase now fully priced. UK bonds rallied, with the yield on two-year gilts dropping 12 basis points to 4.88%, the lowest since Aug. 10.
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The UK’s FTSE 250 index of domestic stocks jumped 1.5% after the inflation boost, with homebuilders sensitive to changes in interest rates leading the gains. Europe’s Stoxx 600 index also benefited from the improved sentiment, climbing for the first time in three days. US equity futures were steady, while a gauge of Asian stocks retreated.
“Inflation is on the mend,” said George Lagarias, chief economist at Mazars. “The figure comes upon the heels of a significant upward revision to growth. While current high rates may continue to reduce economic activity, slowing inflation means that the central bank may unshackle the economy quicker than previously anticipated.”
The UK’s Consumer Prices Index rose 6.7% from a year ago in August, the slowest pace in 18 months, and less than the 7% expected by economists. The chance of a quarter-point rate increase by the BOE at its meeting on Thursday fell, with the market assigning a less than 60% probability from 90% earlier, according to swap pricing.
US Treasuries were steady after yields on both the five- and 10-year notes hit the highest levels since 2007 on Tuesday. The yen steadied after rebounding from its near 10-month low after US Treasury Secretary Janet Yellen said any intervention by Japan to support its currency would be understandable if it were aimed to smooth out volatility.
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Brent crude slipped below $94 per barrel after a recent rally, but prices near a 10-month high, central banks’ fight against inflation remains complicated.
Current fundamentals suggest tightness in the oil market is going to persist, according to Daniel Hynes, a commodity strategist at ANZ Group Holdings Ltd. “The consumers are really grappling for any available cargoes in the market,” he said on Bloomberg Television. “We had a target for the end of the year of $100 a barrel and I suspect that’s going to be beaten.”
May Hold
Fed Chair Jerome Powell and his colleagues are widely expected to hold rates Wednesday. Still, supply shocks such as climbing oil prices present the central bank with a quandary as they simultaneously boost inflation and curb economic growth. Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s.
Aside from expectations of a hawkish hold, investors will focus on the Fed’s updated quarterly rate projections — known as the dot plot — that will be released at the conclusion of the policy meeting. High on the watchlist will be whether these forecasts continue to reveal a median view for one more quarter-point hike this year and whether forecasts for 2024 scale back the 100 basis points of rate reductions that officials foresaw in June.
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“We believe the risk here is to the upside as the Fed may want to reinforce its message that interest rates are due to stay higher for longer,” said Julien Lafargue, chief market strategist for Barclays Private Bank.
Back in Asia, the offshore yuan was little changed after the People’s Bank of China reiterated its commitment to crack down on behaviors that disrupt the FX market. Chinese lenders earlier kept the one- and five-year loan prime rates — the latter being a reference for mortgages — unchanged, following the central bank’s move last week to hold policy rates steady as officials assess the economic impact of existing stimulus.
Key events this week:
- Federal Reserve policy meeting followed by Fed Chair Jerome Powell’s news conference, Wednesday
- Bank of Canada issues summary of its September policy meeting, Wednesday
- Eurozone consumer confidence, Thursday
- Bank of England policy meeting, Thursday
- US leading index, initial jobless claims, existing home sales, Thursday
- China’s Bund Summit, Friday
- Japan CPI, PMIs, Friday
- Bank of Japan rate decision, Friday
- Eurozone S&P Global Eurozone PMIs, Friday
- US S&P Global Manufacturing PMI, Friday
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Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 rose 0.3% as of 8:52 a.m. London time
- S&P 500 futures were little changed
- Nasdaq 100 futures were little changed
- Futures on the Dow Jones Industrial Average were little changed
- The MSCI Asia Pacific Index fell 0.7%
- The MSCI Emerging Markets Index fell 0.4%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.1% to $1.0690
- The Japanese yen fell 0.2% to 148.16 per dollar
- The offshore yuan fell 0.1% to 7.3113 per dollar
- The British pound fell 0.3% to $1.2359
Cryptocurrencies
- Bitcoin fell 0.3% to $27,120.69
- Ether fell 0.5% to $1,635.04
Bonds
- The yield on 10-year Treasuries was little changed at 4.36%
- Germany’s 10-year yield was little changed at 2.74%
- Britain’s 10-year yield declined six basis points to 4.28%
Commodities
- Brent crude fell 1% to $93.37 a barrel
- Spot gold fell 0.1% to $1,928.63 an ounce
This story was produced with the assistance of Bloomberg Automation.
—With assistance from Sagarika Jaisinghani and Netty Ismail.
