Sterling fell on Tuesday against the dollar, which rose broadly on rising expectations that lawmakers would strike a deal that would avert an immediate debt default by the world's largest economy. The pound gave up brief gains seen after British inflation data, which came in slightly higher than expected, lending some support to the view that the Bank of England would hold off pumping more stimulus into the economy.
Annual consumer price inflation stood at 2.7 percent in September, unchanged from August and confounding economists' forecasts for a slight dip to 2.6 percent. "There was a very brief rise in sterling/dollar after the inflation numbers. But then a broad dollar move higher on expectations of a resolution in the US pushed it lower," said Chris Walker, currency strategist at Barclays.
The dollar hit a one-month high against a basket of currencies, supported by news that a bipartisan agreement in the US Senate could be possible. That would end a month-long battle over government spending and raise the United States' debt ceiling. Sterling was down 0.25 percent at $1.5940, having risen to as high as $1.6010 after the inflation data. It remained well below its October 1 peak of $1.6260. The euro was down 0.25 percent against the pound at 84.60 pence, inching away from the six-week high of 85.10 pence struck on Friday. The single currency failed to get much of a boost from a robust German ZEW investor sentiment survey .
With the UK inflation data out of the way, the focus is now on August unemployment data, due on Wednesday. This is forecast to show a steady jobless rate of 7.7 percent and a drop in the claimant count for September. "A lot of the good news has probably been priced in, so we will look to sell into a sterling/dollar rally," said Barclay's Walker.
The Bank of England has pledged to keep interest rates low until unemployment falls to 7 percent, a level it says is likely to be reached in three years. But recent improvement in the jobs market and a general improvement in economic activity have led investors to price in an earlier rate rise. "Markets are a lot more sensitive to the unemployment figures. If we see a nudge lower in the data then sterling could react positively as it would cause the markets to reassess when the 7 percent threshold would be met," said Simon Smith, head of research at FxPro.
However, British data in recent days has fallen short of forecasts, causing investors to question the strength of the economic recovery and weighing on the pound. Earlier on Tuesday Bank of England policymaker Martin Weale expressed concern about the rapid pace of recovery in Britain's housing market and said that UK's large external deficit raised a risk of a downward move in the exchange rate.
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