Sterling slips back towards $1.30 as BoE rate hike bets fade

Sterling slipped back towards $1.30 on Wednesday, adding to falls the previous day after weak inflation data poured cold water on expectations that the Bank of England will hike rates this year. 

The pound had risen above $1.31 to ten-month highs earlier in the week as the dollar fell across the board, and as investors bet that the 25-basis-point cut in British interest rates after last year's vote for Brexit could be reversed in the coming months. 

But BoE policymakers have made it clear that any monetary tightening will be data-dependent, and Tuesday's below-forecast consumer price numbers therefore fed doubt that rates could be tightened in the coming months. 

Having priced in a more than 50-percent chance of a 2017 hike before the data, investors are now pricing in only around a 40-percent chance, according to UBS Wealth Management currency strategist Geoffrey Yu. And even that, said Yu, looked too high, given that markets were pricing in a similar chance of a hike this year by the U.S. Federal Reserve. 

Sterling was 0.1 percent lower on Wednesday at $1.3026, still not far from a high of $1.3126 touched the previous day. Against the euro, it was a little higher at 88.425 pence, but only around a cent away from an eight-month low hit last week.

Tuesday's numbers showed consumer prices rose by 2.6 percent in June compared with a year earlier, down from a nearly four-year high of 2.9 percent in May.

The market is watching developments in Brussels closely, where Brexit secretary David Davis's team is in negotiations with the team of the EU's Michel Barnier to get a deal for Britain to leave the bloc. Any signs that Britain could lose preferential access to Europe's single market are likely to weigh on the currency.