Sterling Holds Firm After UK Data Shows Pickup in Inflation

Pound Remains Steady as UK Inflation Surges Beyond Expectations

Impact of Inflation on the Pound

By Amanda Cooper and Stefano Rebaudo

Currency Market Reactions

LONDON, Jan 21 (Reuters) - The pound held steady on Wednesday, after data showed UK inflation picked up more than expected in December, which could lower the chances of more aggressive rate cuts from the Bank of England this year. 

Bank of England's Interest Rate Outlook

Geopolitical tensions have dominated activity in the currency market this week, overshadowing even economic data, as the prospect of another trade war between the United States and Europe has prompted investors to hedge against this risk by selling U.S. assets, including the dollar against the pound.

Geopolitical Influences on Currency

British inflation rose by more than expected in December, pushed higher by air fares and tobacco prices, but the fastest rate of price growth among the world's big, rich economies is still likely to slow sharply in the coming months. 

Sterling traded at $1.3433, showing little change on the day or from levels traded right before the inflation report.

The greenback rose against the euro and safe-haven Swiss Franc after a two-day U.S. asset selloff as investors await U.S. President Donald Trump's speech at Davos. 

Investors held steady on their bets on the Bank of England cutting interest rates later this year with services price inflation, which is closely watched by the central bank, edging up in line with analysts' forecasts.

Against the euro, the pound also held steady at 87.20 pence, after falling 0.63% the day before in its biggest daily drop since early August.

"Sterling’s underperformance yesterday was, in our view, primarily mirroring the risks of importing bond volatility for a currency that recently experienced periods of negative correlation with back-end yields on fiscal worries," said Francesco Pesole, forex strategist at ING.

"Calmer markets this morning mean euro/pound may face some downward pressure and return below 0.870," he added.

Data from the Office for National Statistics showed on Tuesday Britain's jobs market weakened in November, potentially easing the Bank of England's worries about persistent inflation pressures. 

"That lack of reaction (of the pound to jobs data) though means the market still looks under-priced for BoE rate cuts ahead," said Derek Halpenny, head of research global markets at MUFG.

(Reporting by Stefano Rebaudo and Amanda Cooper; Editing by Samuel Indyk, Alexandra Hudson)