The pound strengthened against the dollar and erased earlier losses against the euro after data showed that United Kingdom inflation accelerated in July and there were signs of further price pressures due to the weak currency.
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The UK’s Consumer Price Inflation (CPI) rose 0.1% to 0.6% in July, as the increasing cost of fuel and second-hand cars drove up transport prices. For the year, inflation is expected unchanged at 0.5 percent. This is the first set of consumer-price data since the country’s decision to quit the European Union. Data showed producer prices rose by 0.3 percent in July, compared with the same month past year, stronger than a median forecast in a Reuters poll.
Data on Friday showed speculative positions against sterling and in favour of the dollar reaching their highest on record – pointing both to further sterling weakness but also to a risk that those positions at some stage get squeezed.
The euro was flat on the day at 86.80 pence, having traded at 87.09 pence beforehand.
Dissatisfaction with the labor market is believed to have been one of the factors which swung the result towards a leave vote, so unemployment data, which are predicted to show a 4.9 percent unemployment rate, will also be interesting for United Kingdom -watchers.
El-Erian said advanced economies such as Britain’s were not created to operate for long on ultra-low interest rates, which together with the associated flattening of the yield curve, made it hard for long-term financial services to operate and hit bank earnings.
With that said, the BOE announced significant easing measures two weeks ago, and explicitly said that they will look past the anticipated higher inflation post-Brexit as the bank focuses on reducing spare capacity at the cost of higher inflation.
“Today’s numbers are unlikely to unseat the BoE’s resolve in regards to using monetary policy to try to mitigate some of the negative economic impact from the Brexit shock”, said Andy Scott, economist at HiFX.
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Weighed down by the dramatic fall in gilt yields since the launch of a new round of easing by the Bank of England 10 days ago, it was flat against a broadly weaker United States dollar at US$1.2918.
