Pound jumps as BoE prepares market for a hike

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The U.S. dollar was dragged down against the British pound Tuesday, with sterling hitting its highest level against the greenback this year after a strong United Kingdom inflation report raised the prospects for the Bank of England lifting interest rates sooner than later.

Maike Currie, investment director for personal investing at Fidelity International, added: "It's now nearly a decade since the Bank of England first took the knife to rates and despite talk about a rate hike being around the corner, it comes as little surprise that the Bank of England's Monetary Policy Committee is still in no rush to raise rates from their historic lows, with a majority 7-2 members voting to hold rates at 0.25%".

But in a week when data showed United Kingdom prices rising faster and unemployment falling to a four-decade low, they said their tolerance for above-target inflation was lessening.

"We still think the chances of a rate rise this year are remote; domestically-generated inflation is subdued, inflation expectations have remained well-anchored and GDP growth is too weak".

We have been saying for a number of months now that the Bank of England will have no choice but to consider the possibility of higher interest rates should inflation approach the 3% mark.

"Prices are rising above target, which creates the case for raising rates, but today's wage data suggests all is still not right in the economy".

The increase in the inflation rate complicates the task for Bank of England policy makers, who are due to meet for a policy decision on Thursday.

Foreign exchange markets raced to price in an earlier-than-forecast interest rate rise at the Bank of England and in the process pushed the Pound notably higher against the majority of global currencies. "We also expect the split vote (7-2) on rates to be maintained". The two dissenters, Ian McCafferty and Michael Saunders, pushed for an immediate rise in interest rates.

Barclays Research: We expect the BoE to offer some support for GBP with hawkish rhetoric on Thursday, but expects limited repricing in short-end rates.

The central bank is concerned that Britain's ability to grow strongly over the medium term without generating excessive inflation has weakened.

Meanwhile, Andrew Sentance, senior economic adviser at PwC argued that while the latest decision from the MPC was not a surprise, some very strong arguments for a rate rise - such as rising inflation, sterling weakness, falling unemployment - have been in place for some time.

If labor market data confirms expectations for an increase in wage growth, fears of a further domestic consumption crunch will ease, as real wage growth will improve.

Markets were left disappointed as the latest confidence index tumble from 12 to 5 in August, its lowest rate in nearly a year and well below the more modest fall to 9 that analysts had predicted. The annual growth was forecast to increase to 2.8 percent.

Most financial stocks were also trading lower.

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