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Sterling ticks higher on surprise inflation surge

06/16/2021 | 11:06am EDT
Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna

LONDON (Reuters) - Sterling rose on Wednesday after data showed British inflation unexpectedly jumped above the Bank of England's 2% target in May, sparking concerns that policymakers may start signalling a shift in policy thinking if prices shoot up again.

Inflation hit 2.1% in May, outpacing forecasts, and looks set to quicken further as the country re-opens its economy after the coronavirus lockdowns.

Against the dollar, the British pound rose 0.2% to $1.4107 at 1442 GMT, homing in on a 2021 high of $1.4250 hit at the start of June. Against the euro, the British currency rose 0.24% to 85.92 pence.

While the rise in inflation is largely driven by local factors, the BoE will be keenly watching whether a stronger currency will help ease price pressures.

The British currency is one of the best performing currencies versus the dollar this year with a net 3.3% rise so far in 2021.

Sterling has staged an impressive rally from a 35-year trough it plumbed in March 2020 at $1.1413 and is about 6% below the $1.5022 level it recorded before Britain voted to leave the European Union on June 23, 2016.

"This transient inflation surge explained away by many central bank chiefs is at risk of becoming something more permanent or at least that continues to be the overhanging concern for markets," said Charles Hepworth, investment director at GAM Investments.

Traders now turn their attention to the BoE's monetary policy committee (MPC) meeting next Thursday, where it is expected to leave policy unchanged. The BoE has said it expects inflation to hit 2.5% by the end of this year before settling back to its 2% target.

"Recent comments suggest some concerns are possibly starting to seep into the MPC's thinking regarding just how strong these downward pressures might turn out to be: if employment levels hold up as the furlough scheme ends then we could start to see the MPC's message become increasingly less-dovish," said Stuart Cole, head macro economist at Equiti Capital.

(Graphic - Brexit: a rollercoaster ride for the pound -

)

(Reporting by Saikat Chatterjee, additional reporting by Thyagaraju Adinarayan and Joice Alves; Editing by Muralikumar Anantharaman, Alex Richardson and Alison Williams)

By Saikat Chatterjee


© Reuters 2021
Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / BRITISH POUND (AUD/GBP) -0.10% 0.5352 Delayed Quote.-4.70%
AUSTRALIAN DOLLAR / EURO (AUD/EUR) -0.20% 0.6255 Delayed Quote.-0.48%
BRITISH POUND / EURO (GBP/EUR) -0.21% 1.1675 Delayed Quote.4.56%
BRITISH POUND / US DOLLAR (GBP/USD) -0.19% 1.3746 Delayed Quote.0.72%
CANADIAN DOLLAR / BRITISH POUND (CAD/GBP) 0.00% 0.579002 Delayed Quote.0.44%
CANADIAN DOLLAR / EURO (CAD/EUR) 0.00% 0.676402 Delayed Quote.5.08%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.03% 0.7956 Delayed Quote.1.31%
EURO / BRITISH POUND (EUR/GBP) -0.02% 0.856 Delayed Quote.-4.32%
EURO / US DOLLAR (EUR/USD) -0.04% 1.1768 Delayed Quote.-3.63%
INDIAN RUPEE / BRITISH POUND (INR/GBP) 0.05% 0.009779 Delayed Quote.-2.63%
INDIAN RUPEE / EURO (INR/EUR) 0.08% 0.01142 Delayed Quote.1.79%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.04% 0.013441 Delayed Quote.-1.90%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.11% 0.697 Delayed Quote.-2.80%
US DOLLAR / BRITISH POUND (USD/GBP) 0.00% 0.727484 Delayed Quote.-0.71%
US DOLLAR / EURO (USD/EUR) 0.03% 0.849762 Delayed Quote.3.75%
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