Sterling Clings to Recent Gains

By Alun John

LONDON (Reuters) – Sterling on Thursday held onto the bulk of its gains against the dollar from the previous day as inflation data suggested the Bank of England may have to raise rates more aggressively, though it slipped a little against a stronger euro.

The pound was last down 0.11% against the dollar at $1.2335, having spiked to an intraday one-month high of $1.2435 a day earlier, and finished the day up 0.5%.

Data released Wednesday showed headline UK consumer price inflation cooled, but inflation in services prices – which some BoE officials view as signalling more persistent inflation pressures and the secondary impact of higher energy and wage costs – rose to the highest since March 1992.

That, alongside recent GDP data showing the British economy is holding up better than feared, is adding to pressure on the Bank of England to keep raising rates.

“Inflation and labour market data point to more BoE hikes,” say UBS analysts who forecast 50 basis points of rate increases at the central bank’s February meeting, and a further 25 basis points in March.

The difference between interest rates in different markets has been one factor driving currency moves in recent months.

The euro, which was also on the front foot against most other currencies, recovered a little more ground against the pound than the dollar, and was last up 0.35% at 87.78 pence.

It dropped to a one-month low of 87.35 pence on Wednesday as the pound was helped by the inflation data.

While there are no major events or data releases in Britain on Thursday, the European Central Bank is due to release its December 2022 meeting minutes, which could have an impact on the euro.

“Some recovery in the euro may still send EUR/GBP back to 0.8800+ by the end of this week,” said Francesco Pesole, EMEA FX strategist at ING in a note.

The pound also lost 0.3% versus the Japanese yen to 158.64, as the Asian currency rebounds after Wednesday’s volatility induced by the Bank of Japan maintaining its ultra dovish monetary stance.

The pound hit a three week high of 161.51 yen on Wednesday.

(Editing by Alex Richardson)