Sterling rises as inflation questions BoE rate hike bets

The pound briefly climbed to a one-week high versus the U.S. dollar and a 21-month high against the euro on Wednesday after data showed UK inflation surged to a 10-year high last month, boosting expectations of a rate hike as early as next month.

The Bank of England is expected to become the first major central bank to raise rates since the coronavirus pandemic crisis rocked the global economy with markets pricing a 61% chance this will happen at a Dec. 16 meeting. "The upside surprise in the October inflation data supports our expectation that the BoE will hike the bank rate by 15bps to 0.25% at its next MPC meeting on 16 December", Berenberg economist Kallum Pickering told his clients in a note, saying that "somewhat surprisingly", market bets for a December hike remained broadly unchanged.

On Monday, BoE Governor Andrew Bailey said he was "very uneasy" about the inflation outlook but some investors remain cautious in calling the central bank's next move after it surprised markets by keeping rates on hold earlier this month. "Unreliableness breeds uncertainty even when it seems obvious", commented Neil Wilson, an analyst at Markets.com.

While the BoE has a 2% inflation target, consumer prices rose by 4.2% in annual terms in October, accelerating from a 3.1% increase in September. Both the BoE and a Reuters poll of economists had pointed to a reading of 3.9%.

Adding to inflation fears, additional data showed British house prices in September were 11.8% higher than a year earlier. The British currency hit a high unseen since February 2020 against the euro and a November 10 high against the dollar after the data was released but its gains faded gradually in morning trading.

At 0950 GMT, sterling traded up 0.02% against the dollar at $1.3430 and was rising 0.11% against the euro at 0.8419 pence. Fears of a trade war with the European Union have also been weighing on the pound.

British Brexit minister David Frost said on Wednesday that his government's preference was to strike a deal to improve post-Brexit trade arrangements for Northern Ireland and that the agreement can be reached by Christmas. Britain left the EU last year but has since put off implementing some of the border checks between its province of Northern Ireland and the rest of the United Kingdom that the bloc says London is obliged to make under the departure deal.