FX round-up: Sterling opens throttle to drive higher as UK inflation accelerates, dollar steers lower
By Andrew Schonberg
Date: Tuesday 21 Mar 2017
(ShareCast News) - Sterling opened the throttle Tuesday to drive higher against a raft of currencies and recoup some of its Brexit-induced weakness, this surge lamentably on the back of a shock acceleration in UK inflation that will hit consumers in the wallet.
At roughly 17:00 GMT, sterling was up 1.1% to $1.2494, and 0.39% higher to €1.1553. It also made heady gains on the aussie, loonie, kiwi, rand and yen. The greenback suffered. The dollar-spot index steering 0.7% lower to $99.705.
Sterling's solid boost on Tuesday came after February's surprise inflation figure sparked speculation the Bank of England (BoE) would raise UK interest rates in the medium to longer term, said FXTM research analyst Lukman Otunuga.
Office for National Statistics said the UK consumer-price index (CPI), an inflation gauge, accelerated to hit 2.3% in February, above Bank of England's 2% target for the first time in more than three years. It was also ahead of market views for 2.1%.
Core CPI, which stripped out volatility, and the CPIH, which included housing, also popped their heads above expectations for a look around.
This was as UK public sector net borrowing put the brakes on, falling £2.8bn to £1.8bn, the lowest February borrowing since 2007 and below forecasts for £3.2bn.
"While the immediate market reaction to this blockbuster inflation figure was bullish, gains may be limited as investors start to reevaluate the ramifications it may have to the UK economy," said Otunuga.
He and other market watchers attributed a chunk of sterling's gains -- it was smacked lower in the immediate aftermath of last year's Brexit referendum and had yet to recover -- to dollar weakness.
"This technical bounce could come to an abrupt end when the focus is redirected back towards the Brexit developments," Otunuga added. Downing St planned to formally start divorce talks with the EU next week, with sterling vulnerable to negotiations updates.
Returning to the dollar, it posted falls against the euro, loonie and yen, but managed barely tepid gains on the aussie, kiwi and rand.
"The US dollar remains in correction mode," said Craig Erlam, senior market analyst at Oanda, in a note issued around midday.
He reckoned this was largely driven by gains elsewhere -- namely sterling -- but also aided by the more dovish than expected language that followed last week's US Federal Reserve rate hike, as BoE stood pat on its policy settings.
This was in tandem with other central banks becoming slightly more hawkish as the environment became more inflationary and economic and political risks appeared to subside. Of the latter, France and Germany's elections remained in focus.
"I still expect the Federal Reserve tightening cycle to be much more aggressive than other central banks over the next couple of years which should be supportive for the dollar during that period."
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