By Samuel Indyk LONDON, Feb 18 (Reuters) - The pound was little changed against the dollar as easing British inflation strengthened the case for a near-term rate cut from the Bank of England, even as
Pound Holds Steady as Inflation Data Boosts BoE Rate Cut Expectations
Impact of Inflation on Bank of England Policy
By Samuel Indyk
Current Inflation Trends
LONDON, Feb 18 (Reuters) - The pound was little changed against the dollar as easing British inflation strengthened the case for a near-term rate cut from the Bank of England, even as underlying price pressures remained strong.
Political Factors Influencing Sterling
Annual consumer prices rose 3% last month, slowing from 3.4% in December, according to official figures. Most economists polled by Reuters had expected headline inflation to drop to 3% in January.
Market Reactions to Economic Data
But inflation for services - closely watched as a gauge of domestic price pressures - slowed only marginally to 4.4% from 4.5% in December, above the Reuters poll expectations for a fall to 4.3%.
The pound was flat after the figures at $1.3566. It fell 0.5% on Tuesday after soft labour market figures boosted rate cut expectations.
"Most people sold sterling quite hard yesterday and thought there was going to be some follow-through today with softer inflation numbers but they didn't come in weaker across the board," said ING global head of research Chris Turner.
"Services CPI was a little bit higher than expected so I think sterling has got a little bit of reprieve on that," Turner added.
Investors are assigning a roughly 85% chance of a 25-basis-point rate cut from the BoE next month, up slightly from Tuesday. Money market traders are fully pricing in two quarter-point rate cuts by the end of the year.
EYES ON POLITICS
The uncertain political situation in Britain remains in focus for pound traders.
Last week Prime Minister Keir Starmer brushed off challenges to quit from within his governing centre-left Labour Party over his appointment of Peter Mandelson as ambassador to Washington.
A by-election - a mid-term local election to fill a vacant parliamentary seat - due next week in Greater Manchester, Northwest England, could reignite questions over Starmer's leadership if Labour were to lose the seat, which it won with more than 50% of the vote in the 2024 national election.
"A big Labour loss would put the focus back on Starmer and sterling and gilts come under a bit more pressure," ING's Turner said.
Against the euro, the pound was up 0.2% at 87.2 pence.
(Reporting by Samuel IndykEditing by Gareth Jones)
