The Pound rallied above 1.60 against the U.S Dollar for the first time this year, while the UK currency also jumped 0.4% higher versus the Euro, after a report from the Office of National Statistics showed that UK inflation accelerated much more than initial forecasts.
Consumer prices rose 3.7% from a year earlier, despite expectations of a more modest increase to 3.4%.
Inflation has remained stubbornly above the government's 3% limit for ten months in a row and will probably accelerate further with the recent increase in VAT. The increase in prices within the UK means that the pressure is growing on the Bank of England to begin raising interest rates from a record low of 0.5%. Will this happen...well it would be interesting see what kind of gumption they have.
The BoE face a difficult balancing act in tempering rising inflation against weak economic growth. Speculation of an interest rate increase over the coming months is supporting the Pound and we may see a sustained move higher over the coming days.
The Bank of England have adopted a wait-and-see approach for the past year, but the MPC is losing some credibility for allowing inflation to remain above the government's upper limit of 3%.
Thanks to the Market Analysis by Adam Solomon from TORFX.
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