US economy

Sterling edges lower versus euro despite strong UK inflation data

© Reuters. FILE PHOTO: A two Euro coin is pictured next to an English ten Pound note in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration

(Reuters) – Sterling edged lower versus the euro and was flat against a rising dollar on Wednesday, although Britain’s more robust than expected inflation data added to pressure on the Bank of England to raise interest rates next month.

But analysts were increasingly considering that markets have already priced in most of the bullish news, including multiple rate rises this year.

British consumer price inflation rose more than expected to 5.4% in December, its highest in almost 30 years, official data showed.

The dollar held firm after a surge in U.S. yields triggered sharp gains against main currencies amid mounting expectations for U.S. interest rate increases.

Sterling was down 0.1% at 83.4 pence versus the euro but still within striking distance of its highest since February 2020 at 83.23 pence, hit on Jan. 11.

“Combined with better November activity data and better jobs data,” Wednesday’s numbers suggested a 25bp BoE hike on Feb. 3, ING analysts said.

“An awful lot is priced for the BoE cycle – yet we think it is too early to ‘fade’ the GBP rally on a fully-priced BoE cycle – just in the same way it is too early to fade the dollar rally,” they said.

The pound was flat against the dollar at $1.3597, after hitting its highest since Nov. 1 last week at $1.3749.

“GBP-USD further receding from recent peaks above 1.37 suggests that upside potential for this pair may be constrained above that threshold,” Unicredit (MI:) analysts said.

Bank of America (NYSE:) (BofA) said it was bearish on the prospects for the British currency, adding that a positioning squeeze was the main driver of its rise at the beginning of 2022.

“Brexit matters, and the UK is faced with a unique set of challenges compared to other G10 nations,” BofA analysts said.

“The passing of the pandemic may ease some of the UK’s supply chain issues, but not all,” they added.

Political risks remained in the background although Prime Minister Boris Johnson was fighting to shore up his premiership after a revolt by his lawmakers who are angry over a series of lockdown parties in Downing Street.

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