Pound Climbs From Month-Low as Post-Brexit Inflation Accelerates

The Historical Risks of Being Short Sterling
  • Sterling strengthens from weakest level since 2013 versus euro
  • U.K. currency advances most in two weeks against dollar

The pound climbed against the dollar after U.K. inflation accelerated in July more than economists forecast, signaling the first concrete effects of the Brexit vote on the country’s economy.

Sterling held close to its weakest level in three years versus the euro as separate data also showed how a weaker U.K. currency since the June 23 referendum led to the biggest jump in import costs in more than four years. PPI input costs surged an annual 4.3 percent last month, ending 32 consecutive declines.

After weeks of surveys, the inflation figures mark the first hard numbers on the economy in the wake of the Brexit vote in June. While the full economic impact of the U.K.’s decision to leave the EU will take time to be seen, data this week on the labor market, retail sales and the public finances will be scrutinized for clues.

“The big surprise has come from the huge upside in the PPI figures,” which may put upward pressure on consumer prices, said Viraj Patel, currency strategist at ING Groep NV in London. “Markets are viewing this as possibly less scope for another bout of aggressive BOE easing in November.”

The pound rose 1 percent to $1.3005 as of 4:35 p.m. London time, the biggest gain since Aug. 2. It fell to as low as $1.2866 Monday, the lowest since July 11. Sterling was little changed at 86.77 pence per euro. It earlier touched 87.25 pence, the weakest level since August 2013.

BOE Stimulus

The U.K. currency has borne the brunt of the Brexit decision, falling to a 31-year low versus the dollar last month in the aftermath of the referendum. It also declined after the Bank of England’s decision announced on Aug. 4 to cut interest rates and boost monetary stimulus, making it the worst performer among major peers in 2016.

Consumer-price growth increased to 0.6 percent from 0.5 percent in June, the Office of National Statistics said Tuesday. Analysts had forecast that the rate would stay at 0.5 percent, according to the median forecast in a Bloomberg survey. The reading is still below the BOE’s 2 percent inflation target, which was last reached in December 2013.

While there’s “no obvious impact” yet on headline inflation from the Brexit vote, ONS statistician Mike Prestwood said that producer-price data “suggest the fall in the exchange rate is beginning to push up import prices faced by manufacturers.” The pound has dropped about 13 percent versus the dollar since the referendum.

There will be more “pound volatility,” ING’s Patel said. “But the bottom line is that sterling will broadly brush off any good news. Markets are looking for any weakness in the hard data as a reason to sell.”

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