Pound holds gains after UK inflation surges to four-year high

[LONDON] The pound advanced and gilts fell as inflation in the UK accelerated to the fastest in four years.

Sterling snapped a three-day drop against the US dollar as annual inflation surged to 2.9 per cent in May from 2.7 per cent a month earlier. The median forecast of economists in a Bloomberg survey was for consumer prices to have increased 2.7 per cent.

The pound was trading higher before the release of the data after Prime Minister Theresa May managed to survive a rebellion from her Conservative lawmakers by pledging to consult the party more over policy and vowing to seek a national consensus on Brexit.

The move higher in sterling "is quite benign," said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. "The market is making a mistake in pricing in a higher rate-hike probability. With higher political risks, and EU negotiations further postponed, I think the probability of a negative scenario for the British economy has increased, which will force the BOE to keep a more expansionary monetary policy for some time."

The pound traded 0.3 per cent higher on Tuesday at US$1.2696 as of 9:51am in London. It touched US$1.2717 earlier in the day. The yield on 10-year gilts rose three basis points to 1 per cent.

BLOOMBERG