Sterling Moves To New Yearly High As Traders Anticipate Upcoming Rate Hike

The British pound soared to a new 2017 trading high, after the Bank of England (BOE) minutes commented that higher inflation and a pick-up in UK growth could lead to a rate hike in “the coming months”. The Bank of England also said “some withdrawal of monetary stimulus is likely to be appropriate over the coming months” to bring inflation back down to the BOE’s two-percent target.

The Bank of England decided to keep UK interest rates unchanged at a record-low 0.25%, with the Monetary Policy Committee voting 7-2 in favour of leaving rates unchanged. The BOE also said there was a “slightly stronger picture” for the economy since its forecast last month thanks to signs of a firmer housing market, stronger employment and a rebound in retail and new car sales.

The market reaction saw the British pound move sharply higher, with the pound breaking above the £1.3600 handle against the US dollar, marking the highest trading level for sterling since June 2016. The pound also made strong gains against the euro, with the EUR/GBP pair breaking below the key 0.8990 level, which accelerated technical selling towards the 0.8800.

US advanced retail sales for the month of August came in much weaker than expected, with official figures showing -0.2%, against expectations of a +0.1% monthly increase. The previous month’s +0.6% increase was also revised lower to +0.3%. Analysts also said the negative number seen in August could be partially attributed to the recent flooding in Texas, and Hurricane Irma.

United States consumer prices accelerated in August, after a spike higher in the cost of gasoline and housing rents. The US Labour Department said that the Consumer Price Index (CPI) rose 0.4% last month, easily beating the 0.1% increase in July. August’s 0.4% CPI gain was the largest in seven months, and lifted the year-on-year increase in the CPI to 1.9% from 1.7% in July.

The US CPI report said that gasoline prices surged 6.3%, which marked the biggest gain since January, after being unchanged in July. Analysts also noted further CPI increases are likely in September, after Hurricane Harvey forced temporary closures of refineries.