British Pound remains depressed against US Dollar following soft UK inflation data

• GBP/USD languishes below 1.3400 following soft UK inflation figures.
• The Pound has lost 1.20% so far this week amid growing doubts about PM Burnham's spending plans.
• The US Dollar remains bid, buoyed by Middle East tensions and higher US yields.

The British Pound (GBP) consolidates losses against the US Dollar (USD) on Wednesday, as a string of UK inflation figures provided some leeway for the Bank of England to maintain its “wait-and-see” stance through the coming months. The GBP/USD pair remains pinned near weekly lows, below 1.3400 following a nearly 1.2% decline in the last four days.

Data released by the UK National Statistics Office on Wednesday revealed that the Consumer Price Index (CPI) moderated to a 2.6% year-over-year (Y-o-Y)  growth in June, from 2.8% in May, below the 2.7% forecasted by market analysts. The Core CPI, however, remained steady at 2.6% against expectations of a 2.5% reading.

Beyond that, the Input Producer Price Index (PPI) contracted 2% on the month, its sharpest decline in more than six years, while the Output PPI remained flat, undershooting expectations of a 0.4% advance. Year on year, input PPI eased to 7.3% from 9.3% while the Output PPI slowed down to 3.5% in June from 3.7% in May.

In the US, the calendar has been thin this week, but the US Dollar maintains a bid tone, buoyed by market concerns about the war in the Middle East and higher US Treasury yields. The US military pounded targets in Iran for the 11th consecutive day on Wednesday, and US President Donald Trump threatened to attack nuclear facilities, which, according to Tehran, would expand the war in the region.

UK Pound slides amid PM Burnham’s early fiscal signals

Rabobank’s FX team notes that “UK markets have now had a few hours to react to PM Burnham’s new cabinet, many of whom have been involved in UK politics for years,” and the initial response has been cautious. They highlight that “10-year gilt yields are currently above the 5% level, which is a sign of some anxiety,” while “the Pound is the worst performing G10 currency on a 1-day view,” underscoring investor unease around the new administration’s fiscal direction.

In the near term, Rabobank points out that “Burnham has promised measures to ease cost-of-living pressures,” with the policy push already underway. “He kicked this off this morning with the news that VAT on household electricity bills will be cut from October,” the bank observes, adding that “the market is now bracing itself for a list of further announcements” as investors assess how these initiatives will be funded and what they might mean for UK assets.