THE pound jumped to a 10-month high against the dollar on Tuesday, before falling back after inflation came in below expectations.
The pound could soar if inflation beats expectations, say experts
Sterling reached 1.3126 against the US dollar – levels not seen since last September – and was flat against the euro at 1.136 ahead of the latest cost of living data.
But Britain’s currency had plunged to 1.307 against the dollar and 1.130, as inflation in June came in at 2.6 per cent, from 2.9 per cent in May.
Higher inflation raises expectations that the Bank of England will raise interest rates sooner rater than later -with the official target for policymakers is two per cent.
Governor Mark Carney recently said that tolerance for above target inflation is fading and raising the base rate can help to rein in rising prices.
However, the slowdown takes the pressure off policymakers to move rates above the current level of 0.25 per cent.
Naeem Aslam, chief market analyst at Think Markets UK, said: “The CPI data took the wind out of the pound rally.
“It was having stabs at the level of 1.31 for the past few trading session but that is in the rear mirror now.
“The data has reduced the pressure on the BOE to change their monetary policy.
“The bank can focus more on a more pressing issue which is Brexit and gear their policies which can ward off any negative effects.
“In other words, the CPI data has confirmed the theme that it is unlikely any further MPC member will be ready to switch camp.
“The upsurge which we experienced in inflation was mainly down to the massive depreciation of the currency and beneath the surface, domestic price pressures are subdued.”