Sterling holds strong before inflation data

Also this week United Kingdom inflation jumped to 2.9%, while unemployment fell to a fresh 42-year low.

Consumer price inflation unexpectedly held steady in July, bucking market expectations for a renewed rise, after fuel prices fell and the effect of the pound’s tumble after last year’s Brexit vote started to fade.

“The BoE is in an unenviable position heading into tomorrow’s MPC meeting, given that inflation is above target but the latest wage and investment data show that the economy is hardly going through a demand-driven boom that needs an immediate monetary response”, said Ranko Berich, head of market analysis at Monex Europe.

CPI measures the weighted average of prices of a basket of goods and services, such as food, transportation, and medical care. Meanwhile the monthly print beat 0.3% estimates and rose from 0.1% to 0.4%.

“We believe it is highly unlikely that the MPC will raise rates in the next two years given ongoing Brexit uncertainties”, said Mike Riddell, a fixed income portfolio manager at Allianz Global Investors.

Economists had also expected BoE Chief Economist Andrew Haldane to join the hawks after inflation shot up to 2.9% in August, which was the joint highest in over five years.

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The MPC’s more hawkish language has caused sterling to jump one cent against the dollar.

While overall inflation is on the rise, wage growth in Britain has stalled, offsetting official data this week showing that the United Kingdom unemployment rate has fallen to a new 42-year low.

“The prospect of a November rate hike is now a real possibility, in our view”, said Kathleen Brooks, research director at City Index.

The bank sounded a more hawkish tone, warning of rates rising in “the coming months”, which sent the pound surging against the dollar, above $1.33. “I believe this is an attempt to take advantage of the now benign growth environment to reverse the emergency interest rate cut in August previous year, following the Brexit referendum”.

That would mean the interest rate paid to savers and the rate charged to borrowers would rise, which would be expected to reduce spending in the economy, and snuff out some of the inflationary pressures in the economy.

Other data this week pointed to the lowest jobless rate since 1975 though wage growth remained stubbornly slow at 2.1%.

A stabilization or gradual creep higher in sterling’s exchange rate may come as a relief to Mark Carney and Co.at the Bank, but it casts a cloud over the FTSE.

“This clearly at the margin makes a move in November more likely, but it depends on what happens to the data between now and then”, said John Wraith, the London-based head of United Kingdom rates strategy and economics at UBS Group AG.