Sterling edged up against the dollar on Tuesday after data showed UK inflation picking up slightly in October, providing some relief for investors expecting a lower number after recent comments from the Bank of England. Consumer prices rose by an annual 1.3 percent in October, up from September's five-year low of 1.2 percent and in line with economists' forecasts in a Reuters poll. Core inflation held steady at 1.5 percent.
Sterling hit a day's high of $1.5669 after the data, from $1.5648 beforehand. It was last trading at $1.5660, up 0.1 percent on the day. It is still not far from a 14-month low of $1.5593 hit on Friday as investors pushed back expectations of when British interest rates would rise after the BoE said inflation could fall below 1 percent in the next six months.
"The inflation data has taken the edge off some of the comments that we've heard from the Bank of England recently," said Jane Foley, a senior currency strategist at Rabobank. "But 1.3 percent year-on-year inflation is still very weak, so in essence, everything that the BoE has been warning about in terms of disinflation is still very relevant."
Over the weekend, the Bank's Governor Mark Carney warned of "huge disinflationary forces" coming from Britain's trading partners, as well as continued slack in the labour market. BoE Chief Economist Andy Haldane said he was watching "like a dove" for signs that expectations of very low inflation in Britain could become entrenched.
"We are seeing more investors put short sterling trades on as inflation is not going anywhere and the BoE doesn't have to hike rates if doesn't wish to," said Peter Rosentreich, chief FX analyst at Swissquote Bank. Sterling struggled against the euro. The euro hit a one-month high of 80.10 pence after Germany's ZEW sentiment index rose for the first time in almost a year. It was last trading at 79.91 pence, up 0.4 percent on the day.
On Wednesday, BoE minutes from the last policy meeting will be released and are likely to show that policymakers want to keep rates lower for longer. Ten-year gilt yields showed little reaction to the inflation data, and were flat on the day at 2.12 percent.
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