Sterling rally stalls on soft UK inflation data

LONDON: A below forecast UK inflation reading halted sterling's rise on Tuesday after a pair of polls showed the "In" camp well ahead in the run-up to Britain's June 23 referendum on European Union membership.

Sterling slipped to $1.4460 after the data was released from $1.4495 beforehand, still up 0.4 percent on the day. The euro trimmed losses, to trade at 78.295 pence , climbing from 78.17 before the data was released.

Data from the Office for National Statistics showed consumer prices rose just 0.3 percent in April compared with a year ago, below forecasts for inflation to remain at 0.5 percent. It was the first time inflation slipped since September last year.

An ONS measure of core consumer price inflation -- which strips out changes in the price of energy, food, alcohol and tobacco -- fell to 1.2 percent, compared with expectations for a 1.4 percent reading.

But house prices were 9.0 percent higher than a year earlier, the biggest rise in a year. In London, prices rose by 13.0 percent, mainly due to an extra property purchase tax that took effect in April. That offered sterling some support, traders said.

"Weaker-than-expected inflation has stalled the early morning rally after recent polls showed the "Remain" camp is taking the lead," said James Ruddiman, director at Audere Solutions a foreign exchange broking and advisory firm.

"However, if the risk of Brexit continues to reduce in the coming weeks we would expect sterling to outperform against currencies such as the euro and Swiss franc."

Earlier in the European session, sterling hit a 2-1/2 week high against the euro, drawing support from the latest poll from ORB for the Telegraph newspaper that showed the "In" camp holding a 15-point lead over its "Out" rivals.

Those wanting Britain to stay in the EU also held an eight-point lead in an ICM poll for the Guardian newspaper on Monday, though another poll showed the "Out" camp in front.

Partly as a result of those polls, the implied probability of a vote to stay in the EU rose to 73 percent on Tuesday, according to betting odds supplied by Betfair.

"With just over a month to go, there seems to be a little more confidence in terms of the outcome next month which is leading to more buying interest in sterling," said Andy Scott, economist at HiFX.

"Nevertheless, taking account of the margin of error in polling and the number of still undecided voters; nothing should be taken for granted and protecting against the potential for significant volatility should remain a priority."

The cost of hedging against sharp swings in the pound over coming two months soared to 7-year highs on Monday, amid a slew of warnings about the impact of a potential Brexit.

Finance minister George Osborne said on Monday a British vote to leave the EU would constitute "a one-way ticket to a poorer Britain", mirroring similar warnings from the IMF and the Bank of England last week.