GBP/USD update (18th Jan 2011, 12:15)

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by Market Moves Staff

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Sterling hit an eight-week high against the US dollar, following a bigger-than-expected increase in UK consumer confidence and CPI inflation.

According to a report from Nationwide, the consumer confidence index rose to 53 for December, from 45 in November, confounding expectations of a slight drop to 44. It would suggest that UK consumers remain optimistic about the economy in 2011 despite the rise in VAT and public sector job cuts, and could provide the Bank of England with a reason (cynics would say ‘an excuse’) to raise interest rates, since improved confidence could lead to higher spending, which would put further pressure on inflation. Meanwhile, data from the Office for National Statistics showed that the consumer price index rose to an eight-month high of 3.7%, up from 3.3% in November and ahead of the 3.4% expected by economists polled by Bloomberg. The news will mean that the pressure on the Bank of England has increased yet again, and Barclays Capital commented that there might be a shift in rhetoric at the bank to acknowledge inflation risks.

Core CPI, which strips out food and fuel prices, rose 2.9% year-on-year, which weakens the bank’s argument that prices are increasing because of temporary developments such as commodity price rises. Expectations of a rise in interest rates to counter inflation are becoming widespread, with Michael Fallon MP, a member of the Treasury Select Committee that oversees the Bank of England, saying that policymakers should start a series of gradual rises to avoid a sharp increase later in the year. The Bank has consistently said that inflation would return to the 2% target during 2011 and 2012, as temporary effects such as the VAT rise subside, but the pressure on Threadneedle Street has definitely been ratcheted up yet again as a result of this morning’s figures. Speculation about an early rate rise will likely drive sterling higher in the short term.

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