FX Roundup: Pound rises as CPI data fuels UK interest rate hike expectation

The pound sterling rose for a second successive session on Tuesday, with the spike being more pronounced and against a broader basket of currencies, as the UK inflation rate turned positive increasing the likelihood of an interest rate rise.

The Office for National Statistics said the Consumer Prices Index (CPI) measure rose to 0.1% in July from June's 0%. CPI has been broadly flat for the past six months, and briefly turned negative in April for the first time since 1960. Additionally, core CPI, which strips out the cost of energy, jumped to 1.2% on an annualised basis; the highest annual rise since February.

It fuelled market speculation that the Bank of England might contemplate an interest rate rise this year, as opposed to 2016, sending the pound higher. At 11:03 BST, the pound was up 0.67% against the dollar and 0.68% against the euro, fetching $1.5691 and €1.41650 respectively.

The cable also rose against 0.32% and 0.46% against the Swiss franc and Japanese yen respectively. Furthermore, the British currency registered gains against Australia and New Zealand dollars rising 0.83% and 0.46% respectively.

However, many commentators remain unconvinced about the Bank of England moving to hike interest rates over the remainder of 2015.

Dominic Bryant, market economist at BNP Paribas, said: “Overall, some of today’s upward surprise to core inflation is likely to reverse in the short-term but, equally, core inflation is likely to have bottomed in June and should trend higher through the remainder of 2015. This supports our long-held forecast that the BoE will deliver its first rate hike of the cycle in February 2016.”

However, Jasper Lawler, analyst at CMC markets, noted: “The pound rallied because if the BoE is truly looking through the fall in energy prices, this is a significant rise in price pressures and puts a 2015 rate hike back on the table.”

Meanwhile, Asia Pacific and commodities linked currencies remained under pressure, losing further ground against the greenback as the market factors in China’s move to devalue the yuan last week.

The AUD$ fell 0.16% fetching $0.7360, as Hong Kong and Singapore dollars shed 0.05% and 0.45% respectively against the greenback. However, preferred carry trade currency – the Japanese yen – reversed the Asian trend, with the dollar fetching 0.14 yen or 0.11% less at JPY124.25.

Finally, the euro continued to trade lower against the dollar changing hands at $1.1075, down 0.03%, as the market awaits verdict of the German parliament over the proposed Greek bailout.