Sterling firms against euro after euro zone inflation numbers, BoE comments

The pound firmed against the euro on Thursday as euro zone data showed core inflation slowing, while the Bank of England’s chief economist said British interest rates should probably stay high to quash “stubbornly high” core inflation.

The euro was last down 0.19% at 85.71 pence, broadly in the middle of its recent range.

Euro zone inflation held steady this month, Thursday data showed, but underlying price growth fell as expected, causing money markets to cut expectations for an ECB rate hike in September.

They are now pricing in a 30% chance of a 25 basis point hike in September, according to LSEG data, compared with a 60% chance expected a day earlier.

Meanwhile BoE Chief Economist Huw Pill said on Thursday that the central bank would “see the job through” on bringing high inflation back down to its 2% target, even if there was a risk that high interest rates hurt Britain’s economy.

Investors see an 80% chance that the BoE will raise interest rates to 5.5% next month, and expect rates to peak at 5.75% before the end of the year.

The pound dipped against the dollar, down 0.28% to $1.2673, but held up better than most major currencies, as the greenback firmed across the board, regaining some ground after three sessions of losses at the start of the week.

Sterling is one of the best performing major currencies against the dollar this year, having been supported by expectations that the Bank of England will keep raising rates longer than most peers and British economic data coming in better than had been feared at the start of the year.

Now, however, several analysts think its period of overperformance is coming to an end.

“I’m not quite sure what can make the pound go up against the euro from here, and the only thing that makes it go up against the dollar is that the world is now too pessimistic about Europe and too optimistic about the U.S.” said Kit Juckes, head of FX strategy at Societe Generale (EPA:SOGN).

“We’re at the point where bad rate rises don’t help currencies – though that’s true of the ECB and Bank of England – and, because we are maniacally data sensitive at the moment and people have built up a big long position in sterling, one piece of bad data for the UK or good data for somewhere else could move those crosses around.”