Sterling fell on Tuesday, as appetite for riskier assets waned and worries about Britain's future in the European Union grew, overshadowing data that showed British annual inflation edging up to a 12-month high last month. The safe-haven yen and the low-yielding euro rose as European shares dropped and crude oil prices turned negative. The pound often moves in tandem with stock prices.
Sterling fell sharply on Monday after Bank of England policymaker Ian McCafferty said inflationary pressures had fallen. Data on Tuesday showed that while the consumer price index fell 0.8 percent on the month, annual inflation rose to 0.3 percent, its highest since January 2015. That was in line with economists' expectation in a Reuters poll.
In afternoon trade in London, sterling fell to $1.4278, having traded at around $1.4495 just before the inflation data which was released at 0930 GMT. It was down 1 percent on the day. The pound also fell sharply against the euro. The euro was up 1 percent at 78 pence, having traded at 77.085 pence before the data was released. "Inflation may continue to slowly climb, but in the grand scheme of things it remains at a very low level. Plus, there are still many factors out there that have the potential to cause havoc... not least the UK's referendum on whether to stay in the European Union," said Dennis de Jong, managing director at UFX.com.
Traders said UK markets were facing a pivotal week ahead of two-day summit starting on Thursday at which Prime Minister David Cameron will try to persuade other leaders to support a deal to keep Britain in the European Union. Some banks predict falls of up to 20 percent in sterling's value if Britons vote to leave the EU, which some recent polls have predicted.
The cost of hedging against swings in sterling's value over the next week has jumped to its highest since Britain's national election last May, as investors brace for volatility stemming from the summit. Focus will turn in the meantime to Wednesday's jobs report and wages data, and any signs of weakness could see sterling extend losses, traders said. "If tomorrow's labour market report once again points towards a slow rise in wages and retail sales on Friday suggest weaker consumption, things may get uncomfortable for sterling," Commerzbank analysts said in a note.