Pound Climbs as U.K. Inflation Accelerates to Two-Year High

  • Sterling adds to gain after state attorney’s comment on Brexit
  • Annual consumer-price growth quickened to 1% last month

The pound advanced the most since August versus the dollar as signs of quickening inflation suggested the Bank of England may have limited scope to keep easing monetary policy.

Sterling also strengthened against the euro as a report showed annual consumer prices rose last month at the fastest pace in almost two years. The U.K. currency extended gains after a British government lawyer said it’s “very likely” that any agreement with the European Union over Brexit would need to be ratified by Parliament. Any delay may cheer investors concerned that the prime minister is prioritizing immigration controls over safeguards for trade and banking.

The pound’s 17 percent drop versus the dollar since the Brexit vote in June is creating difficulty for importers and companies that earn much of their revenue outside the U.K. At the same time, it poses a dilemma for monetary policy makers as it fuels faster inflation that may become an obstacle for the BOE’s easing program.

More than 70 percent of economists in Bloomberg’s latest monthly survey said the central bank will cut the benchmark rate next month after BOE Governor Mark Carney said he will tolerate faster price gains to boost the economy.

While the statistics office said it’s not yet seeing explicit evidence of a currency effect in consumer-price changes, weaker sterling is slowly filtering through the economy, with factories seeing their costs surge.

BOE Outlook

“The rise in the U.K.’s inflationary pressures could interfere with the BOE’s unorthodox plan, prevent the bank from a further rate cut in the medium term and even bring the possibility of a premature rate rise on the table,” said Ipek Ozkardeskaya, a senior market analyst at London Capital Group Holdings Plc. “The likelihood of the pound depreciating below $1.20 level is declining.”

The pound rose 1.1 percent to $1.2314 as of 4:50 p.m. in London. The currency had dropped to $1.1841 on Oct. 7, the lowest since 1985, according to composite prices compiled by Bloomberg of contributions from dealers. Sterling appreciated 1.1 percent to 89.30 pence per euro.

The increases extended after James Eadie, a lawyer advising the government, said both houses of parliament would very likely get a vote on the treaty for leaving the bloc.

“The pound is extending gains on the back of the legal challenge against Brexit,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. in London. “There are suggestions that it would need to be ratified. The bottom line here is that if Brexit goes to the vote, it will likely lose, in its hard form at least.”

Hard Brexit?

The currency weakened this month amid concern that the government will pursue an exit strategy that will see Britain give up its membership of Europe’s single market to secure greater control of immigration and lawmaking. Hedge funds and other large speculators increased bets on a weaker pound versus the dollar to a record earlier this month, according to data provided by the Commodity Futures Trading Commission going back to 1992.

U.K. government bonds rose, with the 10-year yield dropping five basis points, or 0.05 percentage point, to 1.08 percent. The yield increased to 1.22 percent Monday, the highest since Britain voted in June to leave the EU.

Britain’s 10-year break-even rate, a market gauge of inflation expectations derived from yield difference between gilts and index-linked bonds, rose for the first time in five days. It climbed three basis points to 2.96 percent.

“We are looking for U.K. inflation to begin rising, but this is not evidence of increasing domestic demand,” said Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank in London. While the bank predicts a 20 basis-point rate cut in November, it is not “a slam-dunk decision and is certainly likely to be contentious,” he said.

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