Pound Traders Look to U.K. Inflation Data to Bolster Recovery

  • Sterling strengthens versus all its 31 major peers this week
  • Data next week forecast to show U.K. inflation at 2-year high

Pound bulls who found solace this week in political events outside Britain will look for signs of higher consumer prices to underpin the currency’s rally.

Sterling climbed against all of its 31 major peers this week as investors reassessed the outlook for inflation and the rise of populist movements in Europe after Republican candidate Donald Trump’s triumph in the U.S. presidential election. The U.K. currency’s revival helped unwind part of last month’s almost six percent drop versus the dollar.

As concern about the impact of Britain’s decision in June to leave the European Union is pushed to the background, strategists say the pound may extend its recovery if data due next week were to offer more evidence of the economy’s resilience after the referendum as well as signs of accelerating inflation.

“There’s a risk that inflation prints come in higher than consensus over the next few months,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London. “Anything like that would just boost the pound further. The market is very short the pound,” he said, referring to bets that the currency will weaken.

Sterling climbed 0.7 percent this week to $1.2606 as of 5:07 p.m. in London Friday, having jumped 2.7 percent the previous week. It strengthened 3.5 percent to 86.01 pence per euro, the biggest gain since July 2015.

“The pound has got more room to recover” against the euro, NAB’s Friend said. “Investors are now looking at Europe and thinking how this populist shift will carry on.”

Brexit Hearing

Sterling’s best week in more than a year versus the shared currency came as traders waited for a Supreme Court hearing scheduled for Dec. 5-8 that potentially may result in a ruling that delays Britain’s exit from the EU.

The pound is still down about 15 percent versus the dollar since the June referendum. It sank to a 31-year low in October amid speculation that Britain was heading toward a hard Brexit, where unfettered access to Europe’s single market is sacrificed for immigration controls.

“The Brexit debate is waiting for the government’s appeal to the Supreme Court early in December,” said Roberto Mialich, a senior foreign-exchange strategist at UniCredit SpA in Milan. Recent gains in sterling reflect “a technical, rather than strategic, view from traders,” he said.

Data due on Nov. 15 will show U.K. annual inflation accelerated in October at the fastest pace in two years, according to a Bloomberg survey of economists. The figures come after Bank of England this month raised its forecasts for inflation and growth, saying it will tighten or ease policy as needed. Also on Nov. 15, BOE Governor Mark Carney is scheduled to testify before Parliament’s Treasury Committee on the central bank’s revised forecasts.

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