Market Shift Prompted by Inflation Data
The British pound was steady Wednesday. It stood firm against both the dollar and the euro. This was after unexpected inflation news. The data raised hopes of relief for investors. This breathed fresh life into a rally in gilts. It pants the usual connection between currency and yields. The pound was a little bit volatile. It ended unchanged at $1.2209. Investors digested the news that caught them flat-footed. British inflation had slowed. This had been approximately the same timeframe before the data release.
Bank of England Cuts More in the Cards
Important measures of inflation that the Bank of England pays close attention to fell sharply. Traders ramped up bets on an another Bank of England rate cut in February. They are now estimating an 80 percent chance of a 25 basis point cut. That is an increase from 60% before the data. That shift lifted British government bonds, called gilts. These bonds have been under intense pressure recently.
Gilt Yields Shine in Global Pile-On
Britain’s 10-year yield dropped six basis points to 4.82%. The two-year yield, which is sensitive to interest rates, was down nearly eight basis points. These yields beat German and U.S. peers. Gilts have been at the heart of a sell-off in government bonds around the globe this month. In higher borrowing costs, a risk to government finances. The pound got swept up in the sell-off. The pound fell against the dollar and euro. This came even as yield differentials appeared to favor the pound.
Pound Steady Despite Yields Falling
This strange relationship persisted on Wednesday morning. The pound held steady. Gilt yields declined. Kenneth Broux, Societe Generale’s head of corporate research FX and rates, explained. The last pound selling was in response to rising yields, he said. Now, this trend is turning around, which is a relief. The pound was also flat against the euro. It changed hands at 84.37 pence a euro. These strange dynamics show how much depends on the inflation data. It indicates investors are focusing on inflation news rather than traditional yield dynamics.
