The inflation data from the UK triggered a decline in expectations of a higher interest rate in the UK, consequently causing a drop in the value of the pound sterling against various major currency pairs.

On Wednesday (July 19), the pound sterling became the worst-performing major currency. GBP/USD plummeted nearly 1% to a low of 1.2897 following the release of disappointing inflation data from the UK. Meanwhile, EUR/GBP surged to its highest level since late May.

gbpusd

In June 2023, the UK's Consumer Price Index (CPI) only grew by 0.1% (month-over-month), a significant decline compared to the previous period's increase of 0.7%. It also fell short of the consensus estimate of 0.4%.

The Core Consumer Price Index, which excludes volatile items, also showed a sharp deceleration. Core inflation only rose by 0.2% in June 2023, while the consensus expected a slower inflation rate of 0.4%, down from 0.8%.

The annual inflation rates for all items and for core items also declined, with both now at 7.9% and 6.9%, respectively.

These data immediately dampened expectations of a rate hike by the Bank of England (BoE). Previously, the market anticipated a 60% chance of a 50 basis point rate increase at the BoE's Monetary Policy Committee (MPC) meeting on August 3. However, now the likelihood of a 25 basis point increase has risen to around 60%.

The news prompted traders to react by selling off the pound sterling in unison. Moreover, the GBP/USD position has recently become overbought, adding to the selling pressure.

Kenneth Broux from Societe Generale commented, as reported by Reuters, "Finally, some good news for UK inflation. Both headline and core CPI data came in below expectations. The profit-taking in sterling following this release should not come as a surprise as Gilt yields declined against US Treasuries and German Bunds. Pound had already become overbought after its recent rally in the past few weeks."