By Samuel Indyk
LONDON (Reuters) -The British pound dipped against the dollar and the euro on Wednesday, after the annual rate of Britain's consumer price inflation unexpectedly held steady in September, undershooting forecasts for a rise.
The consumer price index remained at 3.8% for the third month running, the Office for National Statistics said on Wednesday, below expectations from a Reuters poll and the Bank of England itself, which had foreseen a rise to 4%.
Sterling was last down 0.4% against
the dollar at $1.3323, its biggest single-day fall in almost two weeks, as investors added to BoE rate cut bets.
Against the euro, it was down 0.4% at 87.05 pence.
INFLATION OPENS RATE CUT DOOR
Core inflation - which strips out volatile food and energy prices - and services inflation both also undershot forecasts, the data showed, prompting investors to add to their expectations for a rate cut from the BoE later this year.
"The BoE has been very focused on food inflation and that came in markedly lower," said ING FX analyst Francesco Pesole.
"That is quite a dovish signal for them."
Interest rate futures were now pricing in about a 75% chance that the BoE's Monetary Policy Committee will cut the Bank Rate to 3.75% by the December meeting, up from about 46% before the data.
"The MPC meeting in November is certainly live, but it comes ahead of the 26 November Budget, which could add to the Committee’s caution," said Jefferies economist Modupe Adegbembo in a note.
"A move in December would allow the BoE to assess policy announcements in the Budget as well as additional data on inflation and wages."
BUDGET CASTS CLOUD OVER STERLING
Investors remain cautious before next month's tax and government spending announcement.
Data on Tuesday showed Britain's borrowing in the first half of the financial year was the highest on record outside of the coronavirus pandemic, keeping up pressure on Finance Minister Rachel Reeves.
ING's Pesole said there are two plausible budget scenarios that could both weigh on sterling.
"If Reeves delivers a convincing budget that helps the gilt market, then it could weigh on rate expectations at the BoE," Pesole said.
"On the other hand, if she fails to calm bond markets and the gilt market got a bit nervous it could spill into the pound. Both scenarios, which aren't too unrealistic, can harm the pound in a way," Pesole added.
(Reporting by Samuel Indyk; Editing by Amanda Cooper and Jane Merriman)
