Sterling was buoyant near 7-1/2 year highs against a trade-weighted basket of currencies on Wednesday, drawing support from expectations that the Bank of England will start raising interest rates early next year. Higher-than-expected core inflation in Britain along with comments from outgoing policymaker David Miles who said a UK rate hike would come "pretty soon" supported the pound, traders said.
It was steady on the day against the dollar at $1.5655 , having hit a seven-week high of $1.5717 on Tuesday after the inflation data was released. It was slightly lower against the euro at 70.52 pence per euro Trade-weighted sterling was at 94.6, not far from a 7-1/2 year high of 94.8 struck on Tuesday. "At the margin, the inflation report provides evidence that domestic cost pressures are rising, moving the BoE closer to raising rates," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi.
"We remain of the view that the pound will continue to outperform alongside the dollar as the BoE moves closer to raising rates from early next year," Hardman added. US inflation for July came in slightly below expectations and investors were turning their focus to Fed minutes later in the day for clues on when the Federal Reserve might hike rates. Following their two-day policy meeting in July, Fed officials said they felt the economy had overcome a first-quarter slowdown and was "expanding moderately".
Investors are currently expecting the Fed to move in either September or December, while they do not expect the BoE to raise rates until around February or March next year. BoE rate-setter Kristin Forbes said on Sunday that interest rates would need to rise long before inflation hits the BoE's 2 percent target. Leaving them low for too long, she said, would risk undermining Britain's economic recovery. "We are looking for two signals to trigger the material pricing in of a February lift-off by the BoE," said Viraj Patel, currency analyst at ING.