Pound slips after inflation, Saunders boost BOE rate bets

Bloomberg

The pound slid and gilts rallied after inflation data backed up Bank of England (BOE) policy maker Michael Saunders’ call for urgent stimulus to boost the UK economy.
Sterling dipped below $1.30 and 10-year government bond yields dropped to the lowest in seven weeks the data fuelled bets that the central bank will lower interest rates this year. Money markets are now fully pricing in a full 25-basis-point rate cut for June, compared to November a day ago, and see a 62% chance of a move this month.
Saunders’ view on the need for more accommodative policy comes just days after BOE governor Mark Carney said Britain’s economic growth had slowed below potential and that the Monetary Policy Committee had discussed the merits of near-term stimulus.
“There is more room for easing expectations to rise should incoming data disappoint and that could keep short-term sterling downside risks intact,” said Manuel Oliveri, a currency strategist at Credit Agricole AG.
The pound slipped 0.1% to $1.3028 in London, after a low of $1.2986, and fell 0.2% to 85.65 pence per euro. Benchmark 10-year gilt yields led a drop across Europe at seven basis points to 0.65%, the lowest since last November.
UK annual inflation came in at 1.3% for December, versus expectations for 1.5%, data showed. Options traders are refraining from joining the pessimism on the pound. Three-week sterling-dollar risk reversals, a gauge of options sentiment that covers the BOE’s January 30 meeting, shows demand for calls and puts is almost matched.

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