FX round-up: Sterling gets a CPI boost as dollar steady ahead of Fed rate call

Sterling put in a plucky performance on major crosses Tuesday as a surprise rise in UK consumer inflation gave the British unit a boot higher.

The day's gains, though, were far short of the fall sterling suffered after the Tory-called UK election returned a hung parliament.

At 17:17 BST, sterling was up 0.7% to $1.2748, and was up 0.77% to €1.1386. It was up strongly against the emerging market currencies, too, and Japan's.

"The pound has been an outperformer today, as yet another unexpected spike in CPI inflation put the Bank of England on the back foot once again," said IG's Joshua Mahony.

UK's consumer-price index was up 2.9% year-on-year in May, its highest level since June 2013 and up from 2.7% in April.

CPI rose 0.3% on the month in May, from 0.5% in April.

"It is clear that inflation is running away from the Bank of England," said Mahony.

"Mark Carney and co will no doubt be wondering whether their accommodative stance will put yet more pressure on affordability as the cost of living runs away from wage growth."

This came ahead of BoE's next rate meeting on Thursday, when the central bank was expected to stand pat on interest rates.

It was also as the Tories tried to salvage a minority government. Markets were talking about the potential for a softer Brexit, however it was too early early to speculate on such matters.

FXTM's Lukman Otunuga said regardless of the current upside gains, sterling was vulnerable to heavy losses due to political instability.

"This period of uncertainty is likely to leave investors on edge as questions are raised over the impact the general election results will have on Brexit negotiations."

Meanwhile, the dollar-spot index was down 0.05% to $97.088, meaning the US currency was broadly steady. It fell on the loonie, kiwi and rand, but was up on the aussie, yen and euro.

"The EUR/USD is hanging around the $1.12 mark, and the mixed economic updates from the eurozone today kept the currency pair broadly flat on the session," said David Madden of CMC Markets UK.

"The European Central Bank (ECB) would like to keep the single currency weak, and the Federal Reserve meeting tomorrow will give us an idea as to what they are going to do over the rest of the year," said Madden.

The Fed was expected to hike tomorrow, with traders having already largely priced that into the greenback and now looking ahead to what the US central bank's next step might be.

Otunuga saw the main dollar risk this week as the Federal Open Market Committee statement.

"A lack of clarity from the Fed regarding future monetary policy and interest rate hike timings may pressure the US dollar further," said Otunuga.