Sterling remained stable against both the Dollar and Euro on Wednesday, as the positive reaction from investors to a cooler-than-forecast inflation report, which led to a rally in gilts, outweighed the usual impact of currency-yield dynamics.

Although the pound fluctuated, it was largely unchanged at the time of writing at $1.2209, as investors processed data revealing that British inflation unexpectedly slowed to 2.5% year-on-year last month.

Sterling was roughly at the same level as before the inflation data was released.

Core growth measures, closely monitored by the Bank of England, showed a sharper decline, prompting traders to raise their expectations for another rate cut in February, Reuters reports.

They now anticipate an 80% chance of a 25-basis point reduction, up from about 60% prior to the data release, which bolstered British government bonds, known as gilts, which had been under pressure.

In addition, the British benchmark 10-year yield fell by 6 basis points to 4.82%, while the more rate-sensitive two-year yield dropped nearly 8 basis points, outperforming both German and US counterparts.

Gilts have been at the centre of a global government bond selloff this month, as rising borrowing costs put pressure on the UK government’s already strained finances.

This has also affected the pound, which has weakened against both the Dollar and the Euro, despite the yield differential between British bonds and US Treasuries or German Bunds moving in a way that would typically be favourable for the pound.

This trend persisted on Wednesday morning, with the Pound remaining steady as gilt yields continued to decline.

“The reason for previous Sterling sell off was the spike in yields, now that's reversing its relief,” according to Kenneth Broux, head of corporate research FX and rates at Societe Generale.

The Pound remained stable against the Euro at 84.37 pence to the single currency.

However, both the Pound and the British government are not yet in the clear. US CPI data, due later on Wednesday, could push government borrowing costs higher globally, including in the UK.