Pound (GBP) Climbs On Prospect Of Rate Rise

Sterling hit a four-month high against the euro and was among the few currencies to rise against the dollar on Tuesday after UK inflation jumped in December and increased the possibility of monetary tightening being brought forward.

Consumer price inflation rose to an annualised 2.9 per cent from 1.9 per cent in November. The market had priced in a rise only to 2.6 per cent.

The immediate market reaction pushed the pound higher on speculation that the Bank of England could raise interest rates sooner than expected.

Late in New York, sterling was 0.2 per cent higher at $1.6373, after touching a five-week high against the dollar, and was up 0.6 per cent at Y149.26 versus the yen.

Most analysts thought the unexpected jump in inflation would be temporary.

Jonathan Loynes at Capital Economics said: “The impact of the recession and the vast amount of spare capacity created will eventually bear down strongly on underlying price pressures.

“As such, we expect the Bank of England to look through the rise in inflation and leave policy unchanged.” The pound was also supported as Kraft (NYSE: KFT), the US food group, acquired Cadbury (LON:CBRY), the UK confectioner, in a £11.9bn deal funded 60 per cent in cash.

Sterling also jumped to a fresh four-month high against the euro, with the single currency down 0.8 per cent to £0.8732, undermined by a fourth-consecutive monthly drop in Germany’s ZEW investor confidence index.

Gareth Berry at UBS said concerns over the fiscal problems in Greece continued to undermine the euro, as rating agencies offered opinions on the recent Greek stability plan.

Moody’s said the plan addressed the most important threats to Greece’s creditworthiness, yet saw no reason to change its outlook from negative.

Meanwhile an analyst at S&P said Greece’s rating could be lowered further if the proposed austerity measures in the budget were watered down.

The euro also fell against a generally stronger dollar, down 0.6 per cent to $1.4297, with the US currency attracting haven flows after losses on Asian equity markets sparked a bout of risk aversion.

The dollar also rose 0.7 per cent to SFr1.0321 against the Swiss franc, gained 0.2 per cent to $0.9241 against the Australian dollar and climbed 0.4 per cent to Y91.16 against the yen.

Elsewhere, the Canadian dollar dropped 0.4 per cent to C$1.0306 against the US dollar after the Bank of Canada, as expected, left interest rates on hold at a record low of 0.25 per cent and maintained its commitment to keeping rates low until the end of the second quarter.