UK consumer price inflation dropped to 2.6% in June from 2.8% in May, coming in better than analysts had forecast. The decline was driven by falling food and fuel prices. Inflation is still above the Bank of England's 2% target, but the direction of travel is clearly downward.
A faster-than-expected drop in UK inflation raises the probability that the Bank of England cuts interest rates sooner, which would lift UK gilts and rate-sensitive equities like homebuilders and banks. Sterling could weaken modestly if markets price in more aggressive cuts, which would benefit large-cap FTSE 100 companies that earn most of their revenue abroad in foreign currency.
August 7: Bank of England rate decision. August 20: UK July CPI release (approximate). September 18: Federal Reserve rate decision, which sets the global rate-cut tone.
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