Sterling extended gains on Tuesday, hitting an eight-week high versus the dollar after a surge in consumer price inflation fuelled expectations that UK interest rates may need to rise soon. Rising oil prices drove annual CPI growth up far more than expected in December to an eight-month high of 3.7 percent, data showed, well above the Bank of England's 2.0 percent target.
Sterling was boosted as the figures added more fuel to speculation that the UK central bank may have to raise rates - which have been chained at a record low 0.5 percent - as early as May. UK money markets, which last week priced in around a 50 percent chance of a UK rate hike in May, were pricing in a 75 percent chance of a move by then after the data.
Higher inflation deepens the dilemma of the BoE, as a rate rise in the near term may choke off the country's economic recovery, particularly as the impact of government austerity measures is expected to kick in this year. In late London trade, sterling traded 0.7 percent higher on the day at $1.5995, after climbing as high as $1.6060 after the data, hitting its highest since late November.
Sterling was also supported by separate data showing a rise in UK consumer sentiment last month and higher house prices in November. The euro fell as low as 83.30 pence after the announcement, before recovering losses to trade at 83.85 pence, up 0.2 percent on the day.
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