European stocks and government bonds rallied on Wednesday as good news on UK inflation added to a picture of cooling price pressures globally, although the data slammed the brakes on sterling’s recent winning streak.
Headline British consumer price inflation fell to 7.9% year-on-year in June, against expectations for 8.2%, in the latest downside surprise for a major economy after more than 18 months of central banks cranking interest rates higher.
Sterling lost 0.6% to trade at $1.2961. It remained 4.75% higher for the last three months, having boomed on speculation the U.S. Federal Reserve would end its rate hikes before the Bank of England does. Against the euro the pound was 0.7% lower at 86.76 pence.
The BoE now had “the green light” for a 25 basis point (bps) rate rise next month, Pantheon Macroeconomics chief UK economist Samuel Tombs said, after markets had previously priced a further 50 bps hike.
“Profit taking in sterling should not be a surprise,” added Kenneth Broux, head of FX and rates corporate research at Societe Generale in London.
News of disinflation in the UK also generated optimism that euro-zone price increases may decelerate more rapidly than economists had forecast, helping the pan-European Stoxx 600 share index (.STOXX) gain 0.5% in early dealings.