Bank of England (BoE) Speculation Flares on Strong UK Inflation Report

Pound Sterling (GBP)

Anticipation for this week’s upcoming Bank of England (BoE) policy decision boosted the Pound on Monday. Investors were hoping that if UK inflation rose again, the BoE may become more pressured into tightening monetary policy in the foreseeable future.

Sterling also edged higher against some majors in anticipation of Britain’s August Consumer Price Index (CPI) results on Tuesday morning.

UK inflation was forecast to rise from 2.6% to 2.8% year-on-year, but came in even higher at 2.9%. Monthly inflation was forecast to come in at 0.5% but jumped to 0.6%.

In reaction to this report, Sterling surged against most major rivals. Investors now look ahead to Thursday’s Bank of England meeting, in hopes the BoE will take a more hawkish stance thanks to the inflation data.

US Dollar (USD)

The Pound to US Dollar exchange rate trended within a tight range during Monday’s session, as both the Pound and US Dollar recovered from their recent lows.

While the odds of a third Federal Reserve interest rate hike are still low, a drop in geopolitical tensions between the US and North Korea has relieved markets this week and made the US Dollar more appealing.

Monday’s US data wasn’t notably influential. August’s consumer inflation expectation report slowed from 2.54% to 2.49% but this had little effect on exchange rates.

Euro (EUR)

The Pound to Euro exchange rate advanced yesterday on central bank speculation. Sterling continued to rally, while the Euro was sold due to comments from European Central Bank (ECB) official Benoit Coeure.

Coeure indicated that while the bank was not worried about the value of the Euro, it was prepared for the currency to affect inflation and was willing to leave monetary policy at accommodative levels in the medium to long-term to counter any potential damage it may cause. This disappointed investors hoping for Eurozone interest rates to be tightened over the next year.

Investors have largely overlooked the latest Eurozone data. The Netherlands’ July trade surplus slipped from €6.64 to €4.7b.

Australian Dollar (AUD)

The Pound to Australian Dollar exchange rate edged higher yesterday due to Bank of England (BoE) speculation. The pair’s movement was volatile due to a rise in demand for risk-correlated currencies.

As North Korea didn’t hold any fresh missile tests over the weekend, traders are now more willing to make risky investments again.

However, GBP/AUD still advanced. Australian Dollar strength was limited by weakness in prices of iron ore, Australia’s most lucrative commodity. The NAB business confidence survey from August also disappointed, slipping from 12 to 5.

New Zealand Dollar (NZD)

The Pound to New Zealand Dollar exchange rate saw volatile trade yesterday, before tumbling on Tuesday morning.

Investors looking to buy risk-correlated currencies found the New Zealand Dollar appealing this morning, as fresh polls for New Zealand’s upcoming general election indicated the National Party’s numbers were recovering and the opposition Labour Party was slipping, following Labour’s surge earlier in the month.

Canadian Dollar (CAD)

The Pound to Canadian Dollar exchange rate slipped during Monday trade. While Sterling advanced on the latest Bank of England (BoE) speculation, the Canadian Dollar’s strength has persisted since last week’s surprising Bank of Canada (BOC) interest rate hike.

Canadian Dollar investors were also encouraged by Canada’s August housing starts report, which beat 216k expectations and rose to 223.2k.

Disclaimer: This update is provided by TorFX, a leading foreign exchange broker, its content is authorised for reuse by affiliates.