Sterling bounces this morning

Sterling hit a three-week high versus the euro and climbed towards $1.30 on Wednesday as traders awaited this week’s Bank of England inflation report and policy meeting.

Sterling’s rise since Prime Minister Theresa May called a snap election last month should help limit a surge in British inflation this year although it will still sail far over the Bank of England’s target.

The National Institute of Economic and Social Research said annual consumer price inflation was likely to peak at 3.4 percent at around the end of this year, lower than a forecast of 3.7 percent it made in February.

British consumer prices are rising fast, fuelled by higher global energy prices and the pound’s plunge following last June’s vote to leave the European Union.

The pound has recovered some ground over the last month to strike a seven-month high near $1.30, reflecting investors’ belief that May’s Conservative Party will gain a large majority in the June 8 election – something that could give her more leeway to strike compromises with the EU in Brexit talks.

The focus now is really on the Bank of England, and maybe that could be an explanation for sterling strength, noting policymaker Kristin Forbes’ vote for a rate hike in March and the possibility that other members of the Bank’s rate-setting committee could follow suit.

The BoE is widely expected to keep interest rates on hold this week and possibly not touch them until 2019 as it waits to see the Brexit impact on the economy.

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