Sterling powers to 7-1/2-year high on trade-weighted basis
By Jemima Kelly
LONDON (Reuters) - Sterling powered to its strongest in 7-1/2 years against a trade-weighted basket of currencies on Tuesday, as better-than expected UK inflation data bolstered bets that the Bank of England will raise interest rates in the coming months.
The numbers from the Office for National Statistics showed consumer prices rose 0.1 percent in July, beating expectations that inflation would remain stuck at zero.
Core inflation, which strips out food, energy, alcohol and tobacco prices, hit a five-month peak of 1.2 percent, up from 0.8 percent in June.
In a market thinned by the summer holidays, the pound took centre-stage. The BoE's trade-weighted sterling index, which measures the pound's purchasing power versus its main trading partners' currencies, gained 0.8 percent to 94.8 <=GBP>. That was its strongest since March 2008.
Against the dollar, the pound hit a seven-week high of $1.5717 , while it gained over 1 percent against the European single currency to trade at 70.27 pence per euro .
Rabobank senior currency strategist Jane Foley said sterling's move higher was being amplified by the fact that investors had reacted strongly to what they perceived as a cautious BoE Inflation Report and minutes on so-called "super-Thursday" on August 6, which had driven sterling lower.
"After super-Thursday there were lots of headlines suggesting that the Bank of England was dovish. But the BoE is one of only two central banks that is preparing the market for an interest rate hike," she said. "I still think we need to call it a hawkish central bank."
Traders must wait until Wednesday, when U.S. inflation data and Fed minutes are released, for further clues on when the BoE's U.S. counterpart, the Federal Reserve, might hike rates.
Market analysts are currently expecting the Fed to move in either September or December, while they do not expect the BoE to raise rates until around March next year.
"We have a substantial gap between UK and the U.S. rate expectations, so the question is: is this gap in rate expectations justified or not?" said Morgan Stanley's global head of FX strategy Hans Redeker.
"Today's numbers are indicating that the gap is too wide, therefore sterling is going up."
In its August report, the BoE stressed that inflation would remain subdued until at least the middle of 2016 and said the impact of the rise in sterling could persist even longer.
But BoE rate-setter Kristin Forbes said on Sunday that interest rates would need to rise long before inflation hits the BoE's 2 percent target. Leaving them low for too long, she said, would risk undermining Britain's economic recovery.
(Editing by Clelia Oziel)
