Sterling holds ground as UK inflation ticks higher

LONDON: Sterling held its ground against the dollar on Wednesday as traders assumed a rise in inflation in March would have little impact on monetary policy and waited for crucial activity and retail sales data due at the end of the week.

Consumer price inflation rose to 0.7% in March after dipping to just 0.4% in February, as global oil prices rose and retailers scaled back their COVID-driven discounts.

"CPI isn't a story that will be driving sterling in the short term", said Jeremy Stretch, a foreign exchange strategist at CIBC Financial markets.

Financial markets see about a 50% chance of a quarter-point increase in interest rates by the Bank of England by the end of next year, but many economists think it might take longer for the BoE to move.

In the short term, Stretch said, investors will focus on Friday's UK Composite Purchasing Managers' Index to gauge the strength of Britain's economic recovery.

The pound was up 0.01% at $1.3939 at 0836 GMT, sitting in striking distance of the $1.40 mark it crossed on Monday for the first time in nearly a month.

Sterling also rose about 0.2% against the euro to 0.8620 pence.

Sterling has been among the best performing in the G10 group of currencies this year as investors hope Britain's rapid pace of vaccinations will lead to a strong economic rebound from the country's worst economic contraction in 300 years.

Analysts at Rabobank wrote on Tuesday that the rise on the currency may soon resume due to positive economic conditions.

"Now that many of the longs positions that were built in the pound during Q1 have been shaken out, it would appear that GBP bulls may be re-grouping", they wrote adding that "support for the pound has come from anecdotal evidence highlighting an encouraging picture from freshly re-opened UK businesses".

Data on Tuesday added further signs the economy is recovering with Britain's unemployment rate unexpectedly falling for a second month in a row to 4.9% in the December-to-February period.