Pound Gains Most in Six Weeks as Data Show Inflation Quickened

  • Sterling rallies from 5 1/2-year low against U.S. dollar
  • U.K. core inflation rises to 1.4%, beats economist forecasts

The pound rallied from a 5 1/2-year low against the dollar and gained for a second day versus the euro as a report showed inflation accelerated last month to the highest in almost a year.

Sterling jumped the most in six weeks against the U.S. currency. Annual U.K. inflation quickened to 0.2 percent in December, from 0.1 percent the previous month, according to the Office for National Statistics. The Bank of England targets a rate of 2 percent. The core inflation rate, which excludes volatile food and energy prices, climbed to 1.4 percent, beating the 1.2 percent forecast in a Bloomberg survey of economists.

“The data was a positive surprise overall but mainly on core inflation,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “That certainly is a good sign and should support the BOE’s plan eventually to hike interest rates this year.”

The pound rose 0.5 percent to $1.4314 as of 11 a.m. London time, the biggest gain since Dec. 9. That’s up from $1.4237 on Monday, the lowest since May 2010. Sterling strengthened 0.7 percent to 75.95 pence per euro, having touched 76.95 on Friday, the weakest level since Jan. 21, 2015.

The U.K. 10-year break-even rate, which measures the bond market’s outlook for price growth, rose for the first time in four days. It climbed six basis points, or 0.06 percentage point, to 2.32 percent. The rate fell to a 6 1/2-year low, based on closing prices, of 2.26 percent at the end of last week amid a slump in oil.

Gilts Tumble

Government bonds, whose fixed payments are favored in times of slow inflation, fell for a second day. The 10-year gilt yield rose six basis points to 1.75 percent. The 2 percent security due September 2025 dropped 0.505, or 5.05 pounds per 1,000-pound face amount, to 102.225.

Even so, the central bank may have to see a further depreciation in the pound before there’s a noticeable impact on inflation that will allow policy makers to raise borrowing costs. The majority of economists in a monthly survey by Bloomberg said the U.K. currency’s 6 percent drop against the dollar in the past two months has strengthened the outlook for consumer prices “a little.”

BOE Governor Mark Carney is scheduled to give a speech in London later Tuesday. Last week, policy makers said they kept interest rates at a record low amid a weakening outlook for growth and inflation.

A report due Wednesday will show average weekly earnings growth slowed in the three months through November, while retail-sales data later in the week will show a contraction, economists predict.

“The data tomorrow and labor-market data if it proves to be stronger would be a more sustainable boost for the pound,” Commerzbank’s Nguyen said. “Uncertainty is still high with regards to the inflation outlook in the U.K. particularly against the backdrop of lower oil prices."

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