The pound continues to gain as inflation slows – London Business News | Londonlovesbusiness.com

The British pound continues its gains for the third day in a row against the US dollar (GBPUSD), by 0.17%, and regains the level of 1.27296.

The Euro also continues to record losses against the Pound (EURGBP) by 0.17% and is still near its lowest levels since August since 2022 at 0.84364 today.

The pound’s gains today come despite inflation came at its slowest pace in more than two and a half years, as expected, but the rise in UK gilt yields and the narrowing of their gap with their corresponding US Treasuries have maintained the pound’s gains.

While today’s numbers do not seem to have changed the markets’ expectations about the possibility of an interest rate cut for the first-time next August by the Bank of England – which is expected to keep current rates unchanged at its meeting tomorrow.

UK 10-year gilt yield rebounded after reaching their lowest level in more than two months yesterday. The yield gap between US 10-year Treasuries and their UK counterparts also continued to narrow in what appears to be a downward trend in the short term.

I believe that the continuation of the downward trend of the yield gap beyond the short term may push it towards zero next, and this would give more momentum to the bullish trend in the pound.

At the same time that UK gilt yield is advancing, we see that German 10-year bund yields is stable today, which has led to a widening of the yield gap to serve the pound’s gains.

While the UK 10-year gilt yield reached 4.08% today, the US Treasury yield reached 4.129%, and the German bund yield reached 2.389%. While the yield gap between the US and the UK amounted to 0.135%, while the yield gap between the German bund and the UK amounted to -1.692%.

As for today’s data, the growth of the Consumer Price Index (CPI) slowed to 2% on an annual basis in May, as expected from 2.3%, but it grew at a lower-than-expected pace on a monthly basis of 0.3%. Core inflation, which excludes food and energy prices, also slowed to 3.5% from 3.9% on an annual basis.

However, the producer price index reading was mixed, as production input prices held steady on a monthly basis, contrary to expectations of a contraction of 0.3%, while output prices contracted by 0.1%, contrary to expectations of their growth.