Sterling unfazed by higher inflation, still driven by dollar

By Olga Cotaga

LONDON (Reuters) – Sterling remained driven by the weaker U.S. dollar on Wednesday in thin August trading, even though British inflation jumped unexpectedly last month to its highest since March.

Last trading at $1.3259, up 0.2% on the day , the pound mirrored a trend higher in major currencies against the greenback, though it remained below the eight-month high of $1.3276 it touched the day before as the dollar weakened.

Against the euro, sterling was flat at 90.14 pence (EURGBP=D3).

UK annual consumer price inflation rose to 1.0% in July from 0.6% in June, as clothing stores refrained from their usual summer discounts as they reopened after the coronavirus lockdown. That was above all forecasts in a Reuters poll of economists that had pointed to an unchanged rate.

“The Bank of England is unlikely to draw conclusions just yet from this data … (therefore) market reaction is likely to remain muted,” said Derek Halpenny, head of research at MUFG.

“GBP/USD is now above pre-COVID levels although much of that is dollar related. The BoE trade-weighted index remains weaker,” Halpenny said.

“That’s a reflection of continued uncertainties like the potential for the BoE adopting negative rates and the outcome of the trade negotiations between the EU and the UK.”

Six-month risk reversals – the difference between put and call options – suggest money managers prefer selling the pound over buying it in the period which incorporates Britain’s clear exit from the European Union in December.