Sterling unfazed by higher inflation, still driven by dollar

08/19/2020 | 06:34am

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote

LONDON, Aug 19 (Reuters) - Sterling remained driven by the weaker U.S. dollar on Wednesday in thin August trading, even though British inflation jumped unexpectedly last month to its highest since March.

Last trading at $1.3183, down 0.4% on the day, the pound mirrored a trend seen in major currencies against the greenback, staying strong but below the eight-month high of $1.3276 it touched the day before as the dollar weakened.

Against the euro, sterling fell 0.1% at 90.24 pence .

UK annual consumer price inflation picked up to 1.0% in July from 0.6% in June, as clothing stores refrained from their usual summer discounts as they reopened after the coronavirus lockdown. That was above all forecasts in a Reuters poll of economists that had pointed to an unchanged rate.

"The Bank of England is unlikely to draw conclusions just yet from this data ... (therefore) market reaction is likely to remain muted," said Derek Halpenny, head of research at MUFG.

"GBP/USD is now above pre-COVID levels although much of that is dollar related. The BoE trade-weighted index remains weaker," Halpenny said.

"That’s a reflection of continued uncertainties like the potential for the BoE adopting negative rates and the outcome of the trade negotiations between the EU and the UK."

Six-month risk reversals - the difference between put and call options - suggest money managers prefer selling the pound over buying it in the period which incorporates Britain's clear exit from the European Union in December.

Brussels has rejected the UK’s opening demands for continued wide-ranging access to the EU for British truckers, the Financial Times reported on Wednesday, setting the stage for a clash as Brexit trade negotiations resumed this week.

The UK reiterated many times that it still hopes for a post-Brexit trade deal to be achieved in September, while both parties have given themselves a self-imposed deadline by October.

In theory, there is still time until the end of this year to forge a deal, but no progress so far, the amount of time available looks limited, analysts say.

(Reporting by Olga Cotaga Editing by David Holmes, Kirsten Donovan)

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