LONDON (Reuters) - Sterling surged by almost 1 percent on Tuesday to its highest level in a year against the dollar, after a report showed UK inflation rose to match its highest in more than five years, adding pressure on the Bank of England to do more to support the currency.
Inflation rose to 2.9 percent in August from a year earlier, more than forecast and above the BoE’s 2 percent target, as households paid more for fuel and clothing. That complicates the job faced by policymakers of explaining why they are not raising interest rates.
The pound had already been higher on the day, after Britain’s parliament voted early on Tuesday to move the government’s European Union withdrawal bill - or repeal bill - to the next stage of a lengthy lawmaking process .
Investors said passing the hurdle, while expected, removed a layer of political uncertainty that had been keeping downward pressure on the pound.
News that the EU and Britain had agreed to move the next round of Brexit talks to the week beginning Sept. 25 - from Sept. 18 previously - because of the British political calendar had no discernible impact on sterling, with focus on the BoE’s policy meeting on Thursday.
“Everyone is taking the Brexit news with a pinch of salt right now; interest rates are more in focus,” said Tauseff Kanji, a currency trader at ETX Capital.
After the inflation data, sterling rose as high as $1.3288 GBP=D3, its strongest since Sept. 13, 2016. By 1455 GMT, it was slightly lower at $1.3273, still up 0.8 percent on the day.
Against the euro, the pound jumped 1 percent to 89.84 pence EURGBP=D3, its strongest in six weeks, before easing back to trade up 0.7 percent on the day.
“(The BoE has) clearly signaled in the past that they have very little tolerance now for further upside inflation surprises, and today’s release is unwelcome from that perspective,” said MUFG currency strategist Lee Hardman, adding that the repeal bill vote had removed further downside risk for sterling.
Short sterling interest rate futures <0#FSS:> inched downwards, pricing in a slightly higher outlook for BoE rates. London's FTSE 100 .FTSE fell as the gains for the pound weighed on the index's mainly foreign-earning constituents.
Expectations of a more hawkish message from the Bank of England have been at the heart of a recent steadying of the pound, sold heavily in the aftermath of Britain’s decision to quit the EU.
Sterling has gained nearly 4 percent against the dollar in the last three weeks.
Two members of the Bank’s Monetary Policy Committee are already voting for higher rates. Any more defections to that camp on Thursday would be liable to drive the currency higher.
But with the economy struggling, many traders doubt the Bank’s ability to raise rates at all.
Labor data on Wednesday will flesh out the picture further before the Bank meets.
Additional reporting by the London Markets Team; Editing by Larry King