In London, a shopper is seen consulting her shopping list in a supermarket. This image represents the current state of European stocks and government bonds, which experienced a rally on Wednesday. The positive news regarding UK inflation contributed to a global trend of cooling price pressures. However, the data put a halt to the recent success of the British pound. The headline consumer price inflation in the UK decreased to 7.9 percent year-on-year in June, beating expectations of 8.2 percent. This unexpected decline follows a period of central banks increasing interest rates for more than 18 months.
As a result, the sterling currency lost 0.6 percent, trading at $1.2961. Nonetheless, it has maintained a 4.75 percent increase over the past three months due to speculation that the US Federal Reserve will end its rate hikes before the Bank of England. Against the euro, the pound fell 0.7 percent to 86.76 pence. According to Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, this data gives the Bank of England the green light to increase interest rates by 25 basis points next month. Previously, the market had expected a larger increase of 50 basis points.
The decline in UK inflation also created optimism about a potential deceleration of price increases in the eurozone, surpassing economists’ forecasts. This optimism led to a 0.5 percent gain for the pan-European Stoxx 600 share index in early trading. London’s FTSE 100 and FTSE 250 also experienced positive growth at 0.6 percent and 1.2 percent respectively. In the bond market, the yield on the two-year UK gilt, which reflects interest rate expectations, decreased by 25 basis points to 5.083 percent. This represents the largest one-day fall since March. In Germany, the two-year bond yield dropped 7 basis points to 3.179 percent, while the 10-year yield, which serves as a benchmark for Euro-zone debt costs, fell 5 basis points to 2.35 percent.
The European Central Bank (ECB) also played a role in the positive performance of European bonds. Comments made by ECB governing council member Klaas Knot indicated that rate hikes beyond the upcoming meeting were uncertain. This aligns with the market’s perception that the end of the interest rate hikes is near.
Meanwhile, benchmark 10-year US Treasuries yields showed a decrease of 5 basis points, reaching 3.772 percent. Futures trading on Wall Street’s S&P 500 and Nasdaq 100 share indices suggests a steady opening later in the day. The Japanese yen experienced a decline, reaching a one-week low of 139.43 per dollar, while Japanese government bonds rallied following the Bank of Japan’s governor stating that policy shifts are still some time away.
Overall, these developments in the European stocks and government bonds market reflect a positive trend in cooling price pressures globally. The unexpected decline in UK inflation provides an opportunity for the Bank of England to implement a modest rate rise next month. Additionally, the comments from the ECB governing council member add to the market’s belief that the hiking cycle in Europe is coming to an end.
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