- Sterling is falling after a sudden drop in UK inflation, and the Euro is strong
- Government bonds are rising on the hope that the central bank’s interest rate will stop
- European stock indices rebound
LONDON/SYDNEY, July 19 (Reuters) – European stocks and government bonds rebounded on Wednesday as good news about UK inflation slowed price pressures globally, although sterling’s recent string of gains was hampered by data.
UK headline consumer price inflation fell to 7.9% year-on-year in June, against expectations of 8.2%, in the latest negative surprise for a major economy after more than 18 months of central banks raising interest rates.
The British pound lost 0.6 percent, to trade at $1.2961. It has remained up 4.75% for the past three months, after booming on speculation that the US Federal Reserve will finish raising interest rates before the Bank of England does. Against the euro, the pound fell 0.7% to 86.76 pence.
Samuel Tombs, chief British economist at Pantheon, said the Bank of England now has the “green light” to raise interest rates by 25 basis points next month, after markets had previously pinpointed another 50 basis point increase.
“The profit-taking on sterling should come as no surprise,” added Kenneth Brooks, head of foreign exchange and corporate research at Societe Generale in London.
News of declining inflation in the UK also generated optimism that price increases in the eurozone may slow more quickly than economists had anticipated, helping the European stock index Stoxx 600 (.STOXX) post gains of 0.5% in early trade.
London’s FTSE 100 (.FTSE) rose 0.6% and the domestically concentrated FTSE 250 (.FTMC) rose 1.2%.
In bond markets, the yield on 2-year UK bonds, which measures interest rate expectations and moves inverse to the government debt guarantee rate, fell 25 basis points to 5.083%.
It was set to score the biggest one-day touchdown since March.
The 2-year German Bund yield fell 7 basis points to 3.179%. The 10-year yield, a benchmark for the costs of debt in the eurozone, fell 5 basis points to 2.35%.
Eurozone bonds also benefited from comments made by ECB Governing Council member Claes Nott on Tuesday that a rate hike after next week’s meeting was “by no means certain”.
“This is probably the first time that a well-known hawk within the ECB has supported the market view that we are near the end of the cycle of trolling in Europe,” said Chris Weston, head of research at Pepperstone in Melbourne.
The 10-year US Treasury yield fell 5 basis points, at 3.772%.
Futures trading indicated that the S&P 500 and Nasdaq 100 stock indices on Wall Street will open steadily later in the day.
The yen fell to a one-week low of 139.43 per dollar, and Japanese government bonds rose after the Bank of Japan governor stuck to his text that policy shifts are still some time away.
Editing by Sam Holmes and Bernadette Baum
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