STERLING SLIPS AFTER SHARP FALL IN INFLATION – Drop caused markets to bring forward bets on when the Bank of England will start cutting interest rates

The Pound Sterling fell against the dollar and euro after data showed inflation fell in November and came in well below expectations, causing markets to bring forward bets on when the Bank of England will start cutting interest rates.

The pound was last down 0.56% at $1.2659, having been down around 0.15% immediately before the data . It also softened versus the euro, which was up 0.43% at 86.62 pence.

British annual consumer price inflation fell to 3.9% in November from 4.6% in October, the lowest pace since September 2021.

The reading was below all forecasts in a poll of economists, which had pointed to a rate of 4.4%. Core inflation also cooled by an unexpectedly large amount, to 5.1% from 5.7%.

That caused markets to bring forward their expectations of Bank of England rate cuts, and they are now fully pricing in a 25 basis point cut by May 2024, and show nearly a 50% chance of such a cut by March.

Expectations of the BoE’s relative hawkishness in comparison with other major central banks has supported sterling in recent weeks.

British shares and government bonds, known as gilts, rallied on the data.

Britain’s 10-year yield dropped 10 basis points to 3.55% and the rate-sensitive two-year yield fell 17 bps.

Both Britain’s blue chip FTSE100 stock index and the domestically focused FTSE250 index rose over 1% to their highest since May.