Like the Euro, the British pound dropped to a one month low against the US dollar today on the combination of broad dollar strength as well as weaker economic data. Consumer prices dropped by 0.6 percent in the month of July, pushing the British pound back below 2.0 for the first time in seven weeks.
Given the weakness in producer prices for the same month, the market was already looking for a decrease in consumer prices, but not one by this magnitude. However it seems that the drop in food prices pushed the annualized pace of inflation growth below the Bank of England?s 2 percent target for the first time since March 2006. The Bank of England did not have this information at its last meeting which means that it would not have had an impact on their hawkish inflation bias. However the BoE has long been a very dynamic central bank and we believe that the drop in inflation will make the most recent interest rate hike the last.