2/2

© Reuters. FILE PHOTO: A New Zealand Dollar note is seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration

2/2

By Rae Wee and Alun John

LONDON/SINGAPORE (Reuters) – Sterling slid on Wednesday after lower-than-expected British inflation data suggested the Bank of England might not have to raise rates quite as high as had been expected, while the latest dovish comments from the Bank of Japan caused the yen to soften.

The pound was last down 0.78% against the dollar at $1.2930, and also weakened versus the euro after figures showed British inflation fell more than expected in June and was at its slowest in more than a year at 7.9%.

That meant the British currency was set for its biggest percentage fall against the dollar in three weeks, as it continued to roll off a 15-month high of $1.3144 hit Thursday.

“Good news at last for UK inflation. Below forecast headline and core,” said Kenneth Broux, head of corporate research FX and rates, at Societe Generale (OTC:).

“Profit taking in sterling as a result should not be a surprise as Gilt yields come down vs U.S. Treasuries and Bunds. The pound was overbought after the run-up in recent weeks,” he said referring to British, U.S. and German government bonds.

Before Wednesday’s data, investors had assigned a roughly 60% chance that the BoE would hike rates on Aug. 3 by a half-percentage point. That turned into a 60% chance of a quarter-percentage point hike after the data.

It was all about central banks in Asia Pacific as well, and the dollar climbed to a one-week high on the Japanese yen and was last up 0.68% at 139.81.

Bank of Japan Governor Kazuo Ueda said on Tuesday there was still some distance to sustainably achieving the central bank’s 2% inflation target, signalling his resolve to maintain ultra-loose monetary policy for the time being, in contrast to the hawkishness at other major central banks.

The New Zealand dollar was also volatile, briefly spiking after consumer inflation came in slightly above expectations in the second quarter, but last traded down 0.57% at $0.6235.

Elsewhere, the euro was down a fraction at $1.12185, away from the previous session’s 17-month peak of $1.1276, and that left the up 0.27% at 100.24, rebounding from a 15-month low hit in the previous session.

The dollar has paused its steep decline last week in the wake of a cooler-than-expected U.S. inflation reading that led to traders pricing in an imminent peak in Federal Reserve rates.

Economists polled by Reuters expect the Fed to deliver a 25-basis-point rate hike at its upcoming policy meeting this month, with a majority betting that will bring an end to the central bank’s current monetary tightening cycle.