March 20, 2018 / 10:33 AM / 4 months ago

UPDATE 1-Sterling's rally stalls as inflation slows more than expected

* Consumer inflation 2.7 pct in February

* Sterling rallied on Monday following Brexit transition deal

* BoE gives rate decision on Thursday

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Writes through after inflation data, adds quotes, prices)

By Tommy Wilkes

LONDON, March 20 (Reuters) - The British pound gave up some of its gains on Tuesday after data showed UK inflation slowed more than forecast in February, the first in a series of economic reports due during a week when the Bank of England is expected to signal interest rates will rise as early as May.

Britain's agreement with the European Union on Monday for a Brexit transition deal - which had sent sterling soaring - clears the path for the BoE to raise rates as early as May. Markets factor in a roughly 70 percent chance of a rate increase despite February's slowing inflation.

Official data published on Tuesday showed consumer prices rose an annual 2.7 percent last month, the weakest increase since last July as the impact of the 2016 Brexit vote faded from the figures.

A Reuters poll of analysts had expected year-on-year consumer price inflation for February to drop to 2.8 percent from 3 percent the previous month.

Against the dollar, sterling had been trading up 0.2 percent at $1.4054 before the data was released and then fell to $1.4028, flat on the day.

Versus the euro, the British currency held its gains as the euro sold off. The pound rose 0.2 percent at 87.75 pence per euro.

Viraj Patel, an analyst at ING, said UK core inflation of 2.5 percent was "high and sticky enough" to warrant the Bank of England's inflation-driven tightening bias.

"Lower inflation means UK real wage squeeze is reversing and that is positive for consumption growth," he said, and that supports sterling.

Wage growth numbers are due on Wednesday and the BoE decision on Thursday. The central bank has signalled that it wants to see wage pressures building before it hikes rates.

"It’s still likely that the Bank of England will signal on Thursday that an interest rate hike is coming in May. Given yesterday’s positive news around the Brexit transition deal, the odds for a rate rise have shortened significantly," said Jake Trask, FX Research Director at OFX.

The pound rallied on Monday to a one-month high of $1.4088 after the European Union and Britain agreed on a 21-month transition following Britain's departure from the EU next year . The two sides are now clear to negotiate what their future trading relationship will look like.

The FTSE turned slightly higher after the inflation figures but remained within its daily trading range, up 0.15 percent by 0935 GMT.

Gilt futures also gained marginally. (Reporting by Tommy Wilkes Editing by Peter Graff)

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