LONDON: Sterling edged up versus the euro, hitting a 23-month high, and rose against a weakening dollar after higher-than-expected British inflation data added to pressure on the Bank of England to raise interest rates next month.
Some analysts were considering that markets have already priced in most of the bullish news, including multiple rate rises this year.
Consumer price inflation rose more than expected to 5.4% in December, its highest in almost 30 years.
Bank of England Governor Andrew Bailey said on Wednesday he was concerned inflation pressures might prove longer-lasting than previously forecast.
Sterling was up 0.1% at 83.23 pence against the euro, after hitting a 23-month high at 83.13.
ING analysts said the inflation numbers, combined with better November activity data and better jobs data, suggested a 25bp hike by the Bank of England on Feb. 3.
“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.
“GBP-USD further receding from recent peaks above 1.37 suggests that upside potential for this pair may be constrained above that threshold,” Unicredit analysts said.
The pound rose 0.3% against the dollar at $1.3630, after hitting its highest since Nov. 1 last week at $1.3749.
Bank of America (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.”
Domestic politics remained in the background, although the Telegraph said 11 lawmakers from Prime Minister Boris Johnson’s Conservative Party had submitted letters of no confidence in him on Wednesday morning.
Some economists argued recently that a conservative successor of Johnson would pursue roughly similar policies but in a much less erratic fashion, benefiting domestic UK economy and financial markets.
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