Pound Drops as Rising Inflation Seen Unlikely to Prompt BOE Hike

  • Currency touches one-week high before reversing gains
  • EU court ruling on U.K.-Singapore deal signals Brexit tensions

U.K. Inflation Rate Increases to 2.7% in April

The pound fell against the dollar, declining from a one-week high, after data showing the fastest inflation since 2013 wasn’t enough to convince investors of an imminent tightening of policy from the Bank of England.

The British currency quickly reversed a jump after the report, which showed consumer prices rose 2.7 percent in April from a year earlier. The BOE boosted its inflation forecasts last week, largely attributing the increase to the sharp decline in sterling since Britain’s European Union referendum. The currency may also have been influenced by a European Court ruling on a Singapore trade deal that might set a precedent for the U.K. in Brexit negotiations.

“Sterling has sold off, demonstrating that for now markets believe the BOE is willing to look through this morning’s data,” Ranko Berich, head of market analysis at Monex Europe wrote in a note to clients.

  • GBP/USD falls 0.1% to 1.2885, after touching 1.2958, the highest since May 10
  • The inflation rate, which climbed from 2.3% in March, was higher than the 2.6% economists had forecast
  • The pound’s moves were capped as markets look to Wednesday’s jobless claims and weekly earnings figures which are likely to highlight the worsening squeeze on workers
  • “Despite inflation overshooting estimates, the pound was unmoved against the dollar,” writes Jake Trask, FX Research Director at OFX
    • Should Wednesday’s Average Earnings Index number “beat estimates then we can expect the pound to rally as the spending power of U.K. consumers avoids being eroded further by the post-referendum drop,” he writes in a client note
  • Signs that the Brexit process is unlikely to be smooth were growing. The EU’s top court said a free trade agreement with Singapore needs the approval of national parliaments before it can become legal, in a case widely seen as setting a precedent for the U.K. as it gears up to leave the bloc
    • “The probability of a rate hike amid Brexit-related uncertainty remains low,” UniCredit analysts write in a client note before the inflation data
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