LONDON: Sterling dropped on Wednesday to its lowest level against the US dollar since November 2020 as British consumer price inflation leapt to its highest level in three decades.
Raising doubts on how aggressive the Bank of England tightening measures will be, British consumer prices jumped to an annual rate of 7.0% in March, the highest since March 1992 and up from 6.2% in February.
Sterling fell to $1.2973 in early London trading, hitting its lowest level against the dollar since November 2020. It traded flat at $1.3004 at 0835 GMT.
Against the euro, it was flat at 83.32 pence.
Traders said that while it was not clear how aggressive the BoE will be with its monetary policy tightening this year, they ramped up bets that the US central bank will accelerate its interest rate hiking.
“The pound has already slipped below $1.30 against the US dollar and could fall further towards $1.25 if we see further aggressive action by the Federal Reserve,” said Michael Hewson, Chief Market Analyst at CMC Markets UK.
In order to tackle inflation, money markets are pricing in a 25 basis points Bank of England interest hike in May, and around 144 bps by December, though many strategists expect it to be less aggressive as the BoE forecasts economic growth will likely slow sharply this year as cost of living pressures mount.
“We think the BoE will try and strike a balance, raising rates at coming meetings to get policy on a more neutral footing, while keeping a watchful eye on how the consumer is holding up,” said Ambrose Crofton, Global Market Strategist at J.P. Morgan Asset Management.