Pound under pressure

Sterling has lost some ground after the release of softer than expected UK inflation data earlier this morning. It has given up almost all of yesterday’s gains against a generally weaker dollar, falling back to around $1.266, and has slipped to about 86.6p to the euro. The single currency is holding onto most of its gains against the US currency, trading at $1.0970.

UK bond yields have also fallen further post this morning’s inflation data, as the market prices in a greater likelihood of Bank of England interest rate cuts next year, with 2- and 10-year yields declining by the best part of 15bps and 10bps respectively.

Sovereign bond yields generally continued to nudge lower yesterday, while equity markets advanced with European stocks reversing most of Monday’s fall and US indices chalking up further gains.

UK headline inflation came in at 3.9 % in November, down from 4.6% in October and lower than the 4.3% expected. Falling energy prices again helped to push down overall inflation, but there was also another notable decline in core inflation, which fell to 5.1% (5.6% expected) from 5.7%, with both core goods and core services inflation declining further. The latter is still running north of 6% however, which will remain a concern for the Bank of England.

Other economic data due today include Euro area construction output and consumer confidence, with consumer confidence scheduled in the US also along with existing home sales.