British Pound Declines as UK Inflation Data Misses Estimates

The British pound declined against most of its major peers on Tuesday following the release of two reports that revealed that inflation in the United Kingdom remained dormant in July. The British currency weakened further against the greenback as strong US retail sales numbers surprised investors.

The official index for tracking changes in consumer prices of goods and services in the United Kingdom dropped 0.1% between June and July, according to today’s release. The drop disappointed forecasts that the index may remain unchanged, as lower motor fuel prices weighed on the index, according to the UK Office for National Statistics.

Higher prices of clothing, electricity, food, and household goods fell short of offsetting the deflationary pressure from lower fuel prices, which lost 1.3% between June and July. Inflation rate in the United Kingdom failed to gain momentum as fuel prices dropped for five months in a row. Over a period stretching 12 months to July, the consumer price index remained unchanged from the previous month at 2.6%, despite forecasts of a 2.7% reading.

A separate report from the same office said that the UK producer input price index remained unchanged in July on a monthly basis to miss estimates of a 0.5% gain. Meanwhile on a yearly basis, the index dropped from 10.0 in June to 6.5 in July. The index measures price changes in good and raw materials purchased by manufacturers.

The sluggish inflation rate in the United Kingdom may prompt the Bank of England to hold its monetary policy unchanged for a longer period. Today’s figures led traders to feel less optimistic about the possibility of an interest rate hike in the near future, which weighed on the British pound.

The pound’s drop against the dollar today was further stoked by solid retail sales data in the United States. The US Census Bureau said that retail sales increased 0.6% in July, which was 0.2% more than what analysts forecast.

EUR/GBP traded at 0.9116 as of 15:15 GMT on Tuesday after rising to 0.9129 at 11:05 GMT, the pair’s highest level since October 2009. EUR/GBP started trading today at 0.9083. GBP/USD fell to 1.2858 after touching 1.2849 at 15:00 GMT, a level last seen on July 12. GBP/USD began the day at 1.2964.

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