Sterling weighed down as shares rose, UK inflation eased

LONDON, SYDNEY, July 19 (Reuters) – European shares and government bonds rallied on Wednesday as good news on UK inflation added to a picture of cooling price pressures globally, although data slammed the brakes on sterling’s recent run of gains.

British consumer price inflation eased to 7.9% year-on-year in June, against expectations of 8.2%, in the latest negative surprise from a major economy after more than 18 months of central banks raising interest rates.

Sterling lost 0.6% to trade at $1.2961. It was 4.75% higher over the past three months, buoyed by speculation that the US Federal Reserve will halt its rate hikes ahead of the Bank of England. The pound was down 0.7% against the euro at 86.76 pence.

The BoE now has the “green light” for a 25 basis point (bps) rate hike next month, UK economist Samuel Tombs, head of Pantheon Macroeconomics, said after markets had previously priced in another 50 bps hike.

Kenneth Brooks, head of FX and rates corporate research at Société Générale in London, said: “It’s not surprising to see gains in sterling.

Inflation news in the UK fueled hopes that euro-zone inflation could ease faster than economists had forecast, helping the pan-European Stoxx 600 stock index (.STOXX) gain 0.5% in early trade.

London’s blue-chip FTSE 100 (.FTSE) added 0.6% and the domestically focused FTSE 250 (.FTMC) rose 1.2%.

In bond markets, the yield on the two-year UK gilt, which tracks interest rate expectations and moves inversely to the price of government debt securities, fell 25 bps to 5.083%.

It was set for its biggest one-day fall since March.

Germany’s two-year bond yield fell 7 bps to 3.179%. The 10-year yield, a benchmark for borrowing costs in the euro-zone, fell 5 bps to 2.35%.

Euro-zone bonds also benefited from comments by European Central Bank (ECB) Governing Council member Klaus Knott on Tuesday that rate hikes beyond next week’s meeting were “by no means certain”.

“This is the first time that a known hawk within the ECB has supported the market’s view that we are nearing the end of the hiking cycle in Europe,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

The benchmark 10-year US Treasuries yield fell 5 basis points to 3.772%.

Futures trading indicated Wall Street’s S&P 500 and Nasdaq 100 stock indexes would open flat later in the day.

The yen fell to a one-week low of 139.43 per dollar and Japanese government bonds rallied after the Bank of Japan’s governor stuck to his script saying policy changes are still some time away.

Editing by Sam Holmes and Bernadette Baum

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