LONDON (Reuters) - The pound dipped slightly against the dollar after data that showed British inflation unexpectedly slowed to an annual rate of 2.5% in December and 0.3% month on month. The pound
Pound Holds Steady Amid Unexpected British Inflation Slowdown
By Alun John
LONDON (Reuters) -The pound held steady on both the dollar and euro on Wednesday as the relief investors felt from a cooler-than-expected inflation print that sparked a rally in gilts outweighed the traditional relationship between the currency and yields.
The pound was choppy, but was last around flat on the day at $1.2209 as investors digested data that showed British inflation unexpectedly slowed last month to 2.5% year on year.
That was broadly where the currency was before the numbers were released.
Core measures of growth, tracked closely by the Bank of England, fell more sharply and as a result, traders increased bets on another BoE rate cut in February.
They now see around an 80% change of a 25-basis point easing, up from around 60% before the data, a shift which supported under-fire British government bonds known as gilts.
The British benchmark 10-year yield dropped 6 basis points at 4.82% and the rate sensitive two-year yield own nearly 8 bps, outperforming German and U.S. peers. [GB/]
Gilts have been at the centre of a global government bond selloff this month as higher borrowing costs threaten the government's strained finances.
This spilled over to the pound which has weakened on the dollar and euro even as the difference between British yields and those on U.S. Treasuries or German Bunds moved in what would be seen as its favour in typical times.
This relationship continued on Wednesday morning, with the pound holding steady as gilt yields fell.
"The reason for previous Sterling sell off was the spike in yields, now that's reversing it's relief," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.
The pound held steady on the euro at 84.37 pence to the common currency.
Thhe pound and the British government are not out of the woods yet. U.S. CPI data is due at 1330 GMT could send government borowing costs higher around the world, including in Britain.
(Reporting by Alun John; Editing by Amanda Cooper and Angus MacSwan)
