Sterling slipped on Wednesday after data showed that British consumer price inflation dropped to 3.6% in October, marking its first decline since May.
The figures prompted traders to increase expectations that the Bank of England may reduce interest rates in December.
Inflation fell from September’s joint 18-month peak of 3.8%, in line with forecasts by the BoE and economists surveyed by Reuters news agency.
The report reinforced the likelihood of a December rate cut, while investors elsewhere struggled for direction amid the release of US economic data that had accumulated during a prolonged government shutdown.
However, analysts believe the decision will remain finely balanced, and do not anticipate that interest rate futures will react significantly to this release.
According to LSEG data, markets now assign an 86% probability of a 25-basis-point rate cut by the BoE in December, up from 80% on Tuesday.
Furthermore, another labour market report and an upcoming inflation release are expected before the December meeting, which could influence rate expectations and may temper any immediate declines in gilts and the Pound.
Earlier this month, the BoE put its quarterly rate-cutting cycle on hold. Meanwhile, Chancellor Rachel Reeves has indicated that she plans to avoid introducing tax or spending measures in her annual budget on 26 November that could exacerbate inflation.
The upcoming budget is set to be the Pound’s next major driver. If Rachel Reeves’ fiscal proposals fail to persuade markets that she has a credible plan for fiscal consolidation over the remainder of the parliamentary term, bond yields could rise sharply, putting significant pressure on the Pound.
Sterling slipped 0.17% against the Dollar to 1.3133, marking its lowest level since Friday, when British markets were volatile amid speculation ahead of the eagerly awaited budget.
Meanwhile, the Euro rose 0.07% against the Pound to 88.14 pence, after hitting 88.64 pence on Friday, its strongest level since April 2023.