Sterling hits one-month high after UK inflation data
Sterling hit a fresh one-month high against the euro and rose versus a weakening dollar on Wednesday after UK inflation data suggested less monetary easing by the Bank of England (BoE).
British consumer price inflation slowed by less than expected to a two-and-a-half-year low of 3.2% in annual terms in March, down from a 3.4% increase in February.
The dollar dipped but was still within striking distance of its 5-1/2-month high after Federal Reserve officials reiterated U.S. interest rates are likely to stay higher for longer.
The pound was last up 0.35% against the dollar at $1.24. It was up 0.16% at 85.30 pence per euro, after hitting its highest level since mid-March at 85.21 pence.
"While both the main and core measures of inflation eased to their lowest levels since late 2021, the continued stickiness in services inflation, in particular, may elicit a cautious approach among Monetary Policy Committee members," said Matthew Ryan, head of market strategy at financial services firm Ebury.
"We still see a realistic possibility of looser policy in the summer, although today's data has somewhat put a spanner in the works," he added. In the first quarter of 2024, a tight labour market and a trade shock from energy prices led analysts to expect that the BoE would likely be cutting rates behind the European Central Bank and the Fed.
The backdrop has changed quite radically in recent weeks.
Markets are currently fully pricing a first move by the BoE by September, a first ECB rate cut by June, and the Fed to decide to ease its monetary policy in the fourth quarter.
Analysts said the consensus also favoured a shallower profile for BoE rate cuts versus the ECB over six months.
"Additionally, the poor state of public finances suggests little room for manoeuvre for the new Chancellor. The latter implies that the election could be a reassuringly boring event for markets," said Jane Foley, forex strategist at Rabobank.
British Prime Minister Rishi Sunak's Conservative Party is set for a heavy defeat at a national election expected this year, according to a projection published early this month, which showed the opposition Labour Party winning more than 400 seats. Some analysts feared the Labour Party could advocate an increase in public spending, threatening financial stability.
Top U.S. central bank officials including Fed Chair Jerome Powell backed away on
Tuesday from providing any guidance on when interest rates may be cut, saying instead that monetary policy needs to be restrictive for longer.
Recent data suggested the U.S. economy was on a different track to that which the Fed had forecast, which led investors to cut their bets on future rate cuts. Risks of a broadening Middle East conflict added to the dollar's shortterm appeal as a safe-haven asset.
Analysts said they were still bullish on the greenback at the current levels.
"On any escalation of the Middle East crisis, we would expect the U.S. dollar to benefit from safe-haven flows," said Jane Foley, senior forex strategist at Rabobank, confirming the target for the euro dollar at 1.05.
The U.S. and its allies planned fresh sanctions against Iran over its unprecedented attack on Israel, seeking to dissuade Israel from a major escalation as its war cabinet was set to meet again on Wednesday to decide a response.
BofA revised last week their call for Fed monetary easing to start in December this year or later, instead of June, and argued the greenback will strengthen even more if markets price out the Fed cuts for this year.
The dollar was slightly lower versus the euro at $1.0628 on Wednesday, not far from the five-and-half-month high of $1.06013 it touched on Tuesday.
Against a basket of currencies, the dollar was last at 106.22, just shy of the five-month peak of 106.51 touched on Tuesday. The index is up 4.8% for the year.
"As the market is still discounting almost two (Fed) cuts this year, the risk is for a hawkish repricing (of the Fed policy path) in the coming weeks," said Olivier Korber, strategist at SG Markets.