UK inflation surprise kicks sterling higher: Reuters

LONDON (Reuters) – Sterling jumped on Tuesday after UK inflation rose to its equal highest in more than five years, adding pressure on the Bank of England to do more to support the currency.

Inflation surged to 2.9 percent, more than forecast and way above the BoE’s 2 percent target as households paid more for fuel and clothing, complicating policymakers’ job of explaining why they are not raising interest rates.

The pound, already higher ahead of the data release, surged to a 1-month high of 90.04 pence per euro, up 0.8 percent on the day. It rose 0.8 percent to $1.3283, its highest since mid-September 2016.

Short sterling interest rate futures <0#FSS:> inched downwards, pricing in a marginally higher outlook for BoE rates, while London’s FTSE 100 fell slightly as the gains for the pound weighed on the index’s mainly foreign-earning constituents.

“The number is simply a nightmare for the BOE. Policymakers are already split in their decision and now the market would expect a more hawkish tone (on Thursday),” said Naeem Aslam, chief market analyst with broker Think Markets in London.

“We have seen a lot of stops taken out at the $1.3230 level.”

UK government bond futures extended losses by around 10 ticks after the data while 10-year gilt yields edged up to their highest since Sept. 1 at 1.076 percent.

Expectations of a more hawkish message from the Bank of England have been at the heart of a recent steadying of the pound, sold heavily in the aftermath of Britain’s decision to quit the EU.

Sterling has gained nearly 4 percent against the dollar in the last three weeks.

Two members of the Bank’s Monetary Policy Committee are already voting for higher rates. Any more defections to that camp on Thursday would be liable to drive the currency higher.

But with the economy struggling, many traders doubt the Bank’s ability to raise rates at all.

Labour data on Wednesday will flesh out the picture further before the Bank meets.

“Our view is that UK monetary policy will remain unchanged again this month, although the risk is the MPC sounds increasingly uncomfortable about a sleepy market attitude to interest rates,” Deutsche Bank economists Mark Wall and Oliver Harvey said in a note on Tuesday.

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