Sterling rose to a nine-week high on Wednesday, helped by strong UK inflation data and as investors prepared for a European Union summit where diplomats will try to pave the way for an agreement on Brexit.
Brussels and London have made positive noises in recent days on major obstacles to Brexit, including how to keep an open Border in Ireland.
That has helped sterling rally more than 4 percent from 2018 lows hit in August when fears that Britain would crash out of the EU without a trade deal spooked investors.
On Wednesday sterling rose to 88.64 pence against the euro, its strongest since August 2nd, while it reached $1.3215, its highest since July 17th, against the dollar. The moves came as UK inflation data climbed unexpectedly to a six-month high in August.
Traders have been unwinding short positions on sterling, partly because they see a growing chance of a breakthrough at an informal EU summit in Austria that starts on Wednesday.
But with only six months before Britain leaves the EU and UK prime minister Theresa May yet to secure a trade deal, investors remain concerned about a disorderly exit, which could plunge the economy into a downturn.
A row within the ruling Conservative Party over the sort of deal Mrs May is proposing has also capped sterling’s gains.
Turning point
“Can May save the pound? This summit is considered a turning point for Brexit. If sentiment sours making a “no deal” scenario more likely, then we could see the pound tumble,” said City Index analyst Kathleen Brooks.
Wednesday’s figures showed consumer price inflation rose at an annual rate of 2.7 per cent in August, compared with 2.5 per cent in July.
The data may surprise Bank of England officials who last month raised interest rates for the second time since the financial crisis. The Bank of England last week said it expected inflation to cool to 2.4 per cent in August.
“While inflation remains stubbornly above the BoE’s target of 2 per cent, economic data is taking a back seat for the foreseeable future as far as driving the pound is concerned with the ongoing Brexit negotiations a far more important factor,” said David Cheetham, a market analyst at XTB. – Reuters
