UPDATE 1-Sterling dips after British inflation cools in April

The pound slipped ​slightly on Wednesday after data showed British ​inflation fell more than expected in April ‌despite the ​U.S.-Israeli war on Iran and as the dollar climbed.

Sterling was last down 0.07% at $1.3384, not far from a nearly six-week low of $1.3304 that was ‌touched on Friday. The euro was down 0.05% against the pound at 86.61 pence .

Headline CPI inflation came in at 2.8% in April, data from the Office for National Statistics showed, down from 3.3% in March and below ‌economists' expectations for a 3% reading. Economists warned that the reprieve was likely to be short-lived, however, ‌given that benchmark global oil prices have risen 50% since the Iran war began and will filter through to the British economy.

Some analysts said the cooler-than-expected reading reduced the immediate pressure on the Bank of England to raise interest rates. Lower expected interest rates ⁠tend to ​weigh on a currency ⁠by making bonds and other investments in a country look less attractive due to lower returns.

"Today's UK inflation data, like yesterday's ⁠jobs numbers, questions the need for aggressive rate hikes," said James Smith, UK economist at ING. Data on Tuesday showed Britain's ​employers reduced their hiring and posted fewer job vacancies in April as the Iran war hit the ⁠economy.

"We continue to think markets are overestimating the Bank of England's willingness to tighten policy at current levels of energy prices," Smith ⁠added. Traders ​in money markets were pricing in just over 50 basis points of BoE tightening by December, down from around 60 bps on Tuesday.

British bond yields have risen sharply over the last two weeks as ⁠traders price in BoE rate hikes and brace for the potential downfall of Prime Minister Sir Keir ⁠Starmer, which could lead to ⁠a more left-wing successor who increases spending. Meanwhile, the pound has slipped as the U.S. dollar has climbed due to fears about the Iran war dragging ‌on; U.S. Treasury yields ‌have also risen.

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