Sterling Shrugs Of Inflation Surge In The UK

On Wednesday, the British pound strengthened against the US dollar as well as the euro, after data showed that inflation in the United Kingdom rose to its highest rate in four decades. But, the inflation data was not very higher than what had already been forecast.

Sterling impact

The release of the inflation data bolstered the possibility of the Bank of England (BoE) raising its interest rates in the next month by 50 basis points than the previous 25 basis points hike expected. However, sterling movements were limited because the hike of 50 basis points had already been priced in by the traders.

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By 1504 GMT, the Sterling had climbed 0.1% higher against the euro to trade at 85.12 pence. An earlier trading session had seen the currency come down to its lowest level against the euro which was last seen on July 7th.

As far as the US dollar is concerned, the British currency remained flat against it at a price of $1.1992, after it reached a high of 11 days on Tuesday. Andrew Bailey, the Governor of the Bank of England, said that an increase in the interest rate of 50 basis points was on the table. This has not happened in Britain in over a quarter of a century. But, he also said that the decision was not ‘locked in’.

Inflation numbers

The data showed that the consumer price index rose in June to a whopping 9.4%, which is the highest figure recorded since February of 1982. The number had stood at 9.1% in May and was higher than the 9.3% that had been forecast by analysts.

Market analysts said that since the CPI data showed inflation was just slightly above forecast, it would not be a major factor in the decision of the Bank of England, regardless of direction. They also said that this meant that the movements in Sterling would likely occur because of the movements in the euro, or the dollar.

They also said that when the inflation data is considered with the wage growth data of the day before, then it clearly shows that the Bank of England will hike the interest rate by 50 basis points in its August meeting.

Unemployment data

On Tuesday, the unemployment data in Britain showed that it held steady at 3.8% in the March to May quarter, while there was a slight growth in regular pay to reach 4.3%. This also supported bets of a higher increase in the interest rates in the next month.

The Bank of England will raise the interest rates for the sixth time in its August 4th meeting. It had begun the hiking process last December in order to combat inflation, which is expected to hit the double digits by October.

Traders are also keeping an eye on the competition to replace British Prime Minister Boris Johnson, with the race down to two candidates now. The choice of the leader could also have an impact on the British currency.

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