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(Bloomberg) — Traders pared bets on further interest-rate cuts from the Bank of England, sending the pound to a three-year high versus the dollar, after data showed UK inflation rose more than expected in April.
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Money markets favor a terminal interest rate of 4% for the first time since early April, which means just one more quarter-point cut this year instead of two. Swaps also imply just a 40% chance of a reduction in August, from 60% before the data.
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Expectation the BOE will be even more careful in lowering interest rates boosted the pound, which was already trading near its highest level this year. Sterling rose as much as 0.8% to $1.3469, the strongest since February 2022, and for the first time since the global financial crisis, options traders are no longer bearish on the pound over the long term.
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A jump in energy, water and other administered prices pushed UK inflation to 3.5% in April from 2.6%, data released on Wednesday showed. It was above the 3.4% forecast by the BOE and the 3.3% economists expected. Services inflation, watched closely by the BOE for signs of underlying price pressures, accelerated to 5.4% from 4.7%.
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“This points to a more cautious approach from the BOE with a more stagflationary environment,” said Kirstine Kundby-Nielsen, FX analyst at Danske Bank.
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The Bank of England cut interest rates by a quarter-point to 4.25% earlier this month in a decision that divided policymakers in three groups. Huw Pill, who voted for a hold, said on Tuesday he is concerned that rates are coming down too quickly and added the speed of disinflation in the economy is “stuttering.”
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The pound’s decline also comes as the dollar weakens this week on speculation that finance ministers are discussing currency policies at their Group-of-Seven meeting this week.
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