The British Pound Sterling received a temporary boost on Tuesday, December 12, from data showing British inflation unexpectedly nearly hit a six-year high in November, with investors betting it would have little effect on how soon the Bank of England would raise interest rates again.
The pound climbed to the day’s high $1.3380 after the data, up from $1.3335 beforehand, before slipping back to $1.3314, down 0.2 percent on the day.
Against the euro, sterling hit the day’s high of 88.07 pence before seasing to 88.44 pence per euro.
Because that is more than a percentage point above the BoE’s 2 percent target, Governor Mark Carney will have to write a letter to finance minister Philip Hammond to explain what the BoE is doing in response.
But because one of the main reasons behind the surge in inflation has been the pound’s plunge since last June’s vote for Brexit – about 12 percent on a trade-weighted basis – the BoE has said it expects it to fall slowly over the next three years to just above 2 percents as sterling steadies.
“The market had geared up for an above-3-percent inflation reading today anyway – if you look at the spread of top-rated economists, about half of them were looking for 3.1 percent,” said Nomura currency strategist Jordan Rochester.
“The Bank of England had acknowledged there was a risk it would go higher, and also thought inflation would go to 3.2 percent last month. So the way the BoE could argue this is that this is just the FX devaluation feeding through just slightly higher than expected, but still feeding through,” he said.
Rochester said inflation would have to stay at elevated levels for another couple of months in order to prompt the BoE to shift to a more hawkish stance.
The BoE is widely expected to keep rates unchanged at 0.5 percent on Thursday.
Analysts said any gains in sterling was being weakened by uncertainty over any Brexit deal.
Prime Minister Theresa May rescued an agreement last week to move divorce talks with the European Union to a second phase after easing the concerns of her Northern Irish allies over the future role of the border with EU member Ireland. But the discussion of post-Brexit trade still contains many pitfalls.
“It seems the UK has taken one step forward in Brexit negotiations last week, th
