Sterling Rallies as U.K. Inflation Breaks Central Bank TargetBy
Investors add bets on Bank of England lifting rates next year
Pound gains seen as temporary as Brexit negotiations loom
The pound rose to the highest in three weeks and gilts fell as U.K. inflation accelerated more than forecast to break through the Bank of England’s target for the first time since 2013.
The data showing annual inflation picked up to 2.3 percent in February, versus a median estimate of 2.1 percent in a Bloomberg survey of economists, underlined bets by investors that the BOE will tighten policy as early as next year. Market rates are now fully pricing a 25-basis-point rate rise by August 2018, compared with a 67 percent chance priced on Monday.
Sterling rallied as much as 0.9 percent to $1.2471, the highest since Feb. 27. Ten-year gilts dropped with yields rising six basis points to 1.29 percent, the highest in more than a month.
However, banks are keeping a cautious outlook on the currency as U.K. Prime Minister Theresa May is set to trigger Article 50 on March 29 to start the process of the nation’s exit from the European Union.
“We suspect sellers will be viewing the post-inflation squeeze higher as an opportunity to re-initiate short sterling positions,” said Viraj Patel, a London-based strategist at ING Bank NV.
Uncertainty is likely to remain high for an extended period, Valentin Marinov, a London-based strategist at Credit Agricole SA, said in a note to clients.
— With assistance by Vassilis Karamanis, and Stephen Spratt