European session review: GBP weakens as investors assess UK's July inflation data and FT's report that Brexit trade talks set to stall again

GBP weakened against most other major currencies in the European session on Wednesday as investors assessed an unexpected climb in British inflation in July and a report by the Financial Times (FT) that Brexit trade talks set to stall again over British truckers’ access to the EU after the end of the Brexit transition period. 

A report from the Office for National Statistics' (ONS) revealed that the UK's consumer price inflation increased unexpectedly to a four-month high in July. According to the report, the annual inflation rate jumped to 1 percent in July after a 0.6 percent gain in June. Economists had forecast a 0.6 percent increase. This was the highest reading since March. Clothing, rising prices at the petrol pump, and furniture and household goods made large upward contributions to inflation, while lower food prices partially offset the annual advance. On a monthly basis, UK's consumer prices rose 0.4 percent, after a 0.1 percent uptick in June, beating economists' forecasts of a 0.1 percent drop. 

Market participants, however, do not expect the Bank of England (BoE) to draw conclusions only from this data. At the August policy meeting, the BoE had forecast inflation to turn briefly negative in the near term, falling to -0.3 percent in August, driven by VAT cut and "Eat Out to Help Out" scheme. According to the estimates of the BoE's policymakers, inflation will fall further below the 2 percent target and average around 0.25 percent in the latter part of the year, largely reflecting the direct and indirect effects of Covid-19.

Investors also await updates on the EU-UK trade negotiations as the new round of discussions started yesterday. The Financial Times (FT) reported today that the talks are set to stall again as the UK's request for continued wide-ranging trucking access to the EU has been rejected by the European Commission. This set the stage for a clash as Brexit trade negotiations resumed this week.