Currencies: Dollar rises against yen; sterling at 2017 high on rate-hike prospects

Currencies: Dollar rises against yen; sterling at 2017 high on rate-hike prospects

An earlier version of this article incorrectly stated the Bank of England’s main policy rate. The article has been corrected.

imageGetty Images

Bank of England Gov. Mark Carney and his colleagues will issue their latest policy decision on Thursday.

The U.S. dollar put in a mixed performance on Tuesday, strengthening against the Japanese yen, but weakening compared with the British pound following a hotter-than-expected U.K. inflation report.

Sterling hit its highest level against the greenback this year after that stronger-than-expected inflation reading raised the prospects for the Bank of England lifting interest rates sooner than later.

The ICE U.S. Dollar index DXY, +0.04% which measures the buck against six major currencies was flat at 91.905. The WSJ Dollar Index BUXX, -0.02% a broader gauge of the dollar’s performance, was also little changed at 85.11.

The biggest mover Tuesday proved to be sterling GBPUSD, +0.0000% which drove up to $1.3257, and rallied to an intraday high of $1.3283, after the U.K.’s Office for National Statistics said inflation rose to 2.9% in August. That was more than the 2.8% reading expected in a FactSet survey of analysts.

“Inflation is thought to be rising due to a weaker pound, not due to fundamentals. The pound has also found support from the U.K Parliament voting against opposition Labor party’s attempt to block EU withdrawal bill, effectively passing its first parliamentary hurdle,” said Dean Popplewell, vice president of currency analysis at OANDA.

BOE this week: The inflation report arrived before the BoE’s Monetary Policy Committee, led by Gov. Mark Carney, is due to issue its latest policy decision on Thursday. The central bank has been widely expected to leave its key rate at 0.25% at the meeting as policy makers have largely been keeping watch on the British economy while the U.K. prepares to exit from the European Union, known as Brexit.

“While we doubt that a rate rise is on the cards for later this week, we believe that there is a chance that the vote split could signal a hawkish shift at the bank, with the potential for Chief Economist Andy Haldane to vote for a rate hike,” said Kathleen Brooks, research director at City Index, in an note.

“Although [Carney] has been concerned about growth, in a speech in June he mentioned the fact that the BOE could not ignore rising prices indefinitely. Is now the time for the governor to put his money where his mouth is and actually vote for a rate hike? If yes, then sterling is likely to fly high, with $1.35 a possibility for GBP/USD.”

The pound on Tuesday was moving closer to $1.33, where it hasn’t traded since September 2016, according to FactSet data.

“Sterling has surged on [Tuesday’s] news, but the week is far from over for the pound,” said Ranko Berich, head of market analysis at Monex Europe, in a note.

“Tomorrow’s labor market data, especially wages, could either challenge or confirm the move we’ve seen today,” he said. “However, ultimately the real decider for sterling is likely to be how much tolerance for inflation the BOE signals on Thursday.”

The Bank of England’s inflation target is 2%. The bank had already said it expected inflation to flirt with the 3% level.

Elsewhere in the currency market, the euro EURUSD, +0.0084% regained ground against the buck erasing earlier losses. Late Tuesday, euro bought $1.1971, up from $1.1953 late Monday in New York.

The single currency has strengthened more than 13% against the dollar since the start of the year as eurozone economy continues to improve and as investors are increasingly betting on the European Central Bank to begin unwinding of its quantitative easing program in 2018.

Against its Swiss counterpart, the dollar USDCHF, -0.0104%  fetched 0.9607 francs, up from 0.9562. Against Japan’s currency, the buck USDJPY, -0.02%  traded at ¥110.08, higher than late Monday’s ¥109.39.