UK Inflation Jump Jolts Sterling To One-Year High
By Jemima Kelly and Patrick Graham
Reuters
Reuters
September 12, 2017
Sterling surged by almost 1 percent on Tuesday to its highest level in a year against the dollar 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. This complicates the job faced by policymakers of explaining why they are not raising interest rates.
The pound had already been higher on the day on the back of a vote in Britain’s parliament to move the government’s European Union withdrawal bill - or repeal bill - to the next stage of a lengthy lawmaking process.
Investors said the passing of the hurdle, while expected, removed a layer of political uncertainty that had been keeping downward pressure on the pound.
After the inflation data, sterling surged to as much as $1.3288 GBP=D3, its highest since Sept. 13, 2016.
Against the euro, too, the pound jumped 1 percent to 89.84 pence EURGBP=D3, its strongest in six weeks.
“The inflation data today has highlighted the fact that the BoE is still moving gradually toward raising rates,” said MUFG currency strategist Lee Hardman.
“They’ve clearly signaled in the past that they have very little tolerance now for further upside inflation surprises and today’s release is unwelcome from that perspective,” he said, adding that the vote to pass the government’s repeal bill had removed further downside risk for sterling.
Short sterling interest rate futures <0> inched downwards, pricing in a marginally higher outlook for BoE rates, while London's FTSE 100 .FTSE fell slightly as the gains for the pound weighed on the index's mainly foreign-earning constituents.
Expectations of a more hawkish message from the Bank of England - which meets this week - 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.
Labor 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.
Sterling surged by almost 1 percent on Tuesday to its highest level in a year against the dollar 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. This complicates the job faced by policymakers of explaining why they are not raising interest rates.
The pound had already been higher on the day on the back of a vote in Britain’s parliament to move the government’s European Union withdrawal bill - or repeal bill - to the next stage of a lengthy lawmaking process.
Investors said the passing of the hurdle, while expected, removed a layer of political uncertainty that had been keeping downward pressure on the pound.
After the inflation data, sterling surged to as much as $1.3288 GBP=D3, its highest since Sept. 13, 2016.
Against the euro, too, the pound jumped 1 percent to 89.84 pence EURGBP=D3, its strongest in six weeks.
“The inflation data today has highlighted the fact that the BoE is still moving gradually toward raising rates,” said MUFG currency strategist Lee Hardman.
“They’ve clearly signaled in the past that they have very little tolerance now for further upside inflation surprises and today’s release is unwelcome from that perspective,” he said, adding that the vote to pass the government’s repeal bill had removed further downside risk for sterling.
Short sterling interest rate futures <0> inched downwards, pricing in a marginally higher outlook for BoE rates, while London's FTSE 100 .FTSE fell slightly as the gains for the pound weighed on the index's mainly foreign-earning constituents.
Expectations of a more hawkish message from the Bank of England - which meets this week - 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.
Labor 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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