Sterling hit a two-week high against the dollar on Tuesday after data showed British inflation unexpectedly rose in July, but further gains were seen as unlikely given the Bank of England was still expected to ease policy in the near term. The pound rose to a two-week high of $1.5730, from around $1.5702 before the inflation release. It surpassed its 200-day moving average at $1.5721 where traders had earlier reported offers, but slipped back to $1.5680, barely changed on the day.
The dollar was also helped by US retail sales data which rose for the first time in four months in July. The data was a sign that consumers could drive faster economic growth in the third quarter and somewhat reduced the chances of another round of quantitative easing by the Federal Reserve. The euro fell to around 78.72 pence, from 78.82 pence before the UK inflation data. The common currency hovered around those levels, hurt by data showing the euro zone economy shrank in the second quarter. Traders cited support for the euro at the 21-day moving average of 78.52 pence.
"Sterling registered a brief uptick on the back of a stronger-than-expected CPI inflation report, though there is little chance that the disappointingly strong inflation data will do anything to alter the BoE's dovish stance," said Jane Foley, senior currency strategist at Rabobank.
She said that the BoE had previously eased policy despite sticky inflation. "Consequently the data leaves the outlook for sterling little changed," she added. Analysts had geared up for annual inflation to slow in July. Instead, consumer price inflation ticked up to 2.6 percent from 2.4 percent in June, confounding expectations of a 2.3 percent reading. "Any rise in sterling is likely to be fleeting at best ... irrespective of July's spike in inflation, the BoE will inevitably have to set the QE money presses rolling again," said Glenn Uniacke, senior dealer at Moneycorp.
Slowing inflation would have made the central bank's task to ease policy much easier, resulting in more money being pumped into the recession-hit economy via the bank's asset purchase programme. The quantitative easing programme (QE) is seen as negative for the pound as it involves the central bank flooding the market with the currency.
Investors are likely to be wary of the pound in a busy week for UK data, with unemployment and retail sales figures due for release, as well as the minutes to this month's BoE Monetary Policy Committee meeting. Figures last month showed the UK economy shrank 0.7 percent in the second quarter, marking its third consecutive quarter of contraction, and surveys since then have pointed to a poor start to the second half of the year.
Some analysts say a cut in interest rates from their record low 0.5 percent may still be a possibility and analysts will comb the BoE minutes on Wednesday for any clues. A rate reduction, however, looks unlikely in the near term after BoE Governor Mervyn King suggested last week that a rate cut might be counterproductive.
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