Strong gains for sterling as rising inflation dampens expectations of further interest rate cuts
Sterling made strong gains against the dollar and the euro as rising inflation dampened expectations of further cuts to UK interest rates.
The pound touched $1.3720 against the greenback, its highest level since May 2018, and €1.1314 against the single currency, a rate last seen in May 2020.
The latest rally came after the Office for National Statistics said inflation jumped from 0.3 per cent in November to 0.6 per cent in December on the back of the rising price of clothes and transport, including petrol prices as well as air, sea and coach fares.
Pound rises: Sterling touched $1.3720 against the greenback, its highest level since May 2018, and €1.1314 against the single currency, a rate last seen in May 2020
These offset falls in the price of meat and vegetables in the run-up to Christmas.
Although inflation is well below the 2 per cent target, the rise last month makes it less likely that the Bank of England will cut interest rates again.
Rates have already been slashed to a record low of 0.1 per cent to prop up the economy in the face of the Covid pandemic – and speculation was mounting that they could fall below zero.
The pound was rising steadily late last year as Britain closed in on a Brexit trade deal with the EU.
A rapid roll-out of Covid vaccines in the UK has fuelled hopes the economy will bounce back this year, giving sterling a further boost.
Michael Brown, market analyst at Caxton, said: ‘The sterling trade is essentially a play on the relative pace of Covid vaccinations, with the UK outpacing both the EU and US in immunising at-risk groups.
‘Faster vaccinations means a faster lifting of lockdown, and thus a faster economic recovery.’