LONDON (Reuters) - Sterling edged up against the dollar on Tuesday, continuing a modest rebound from three-week lows hit on Friday, as traders eyed UK inflation data for clues on when and how fast the Bank of England will raise interest rates.
Consumer price index (CPI) numbers due at 0930 GMT are expected to show inflation annual inflation eased to 2.9 percent in January, from 3 percent the previous months - still well above the BoE’s 2 percent target. Core inflation, meanwhile, is expected to tick up to 2.6 percent from 2.5 percent in December.
Last week the BoE said it expected to raise interest rates earlier and by more than it had thought in late 2017, because of the strength of the global economy and signs that British pay growth was picking up speed.
“Any upside surprise today versus the consensus for a fall in the annual CPI will reinforce expectations of the BoE being more active in hiking rates,” wrote MUFG’s head of European market research, Derek Halpenny, in a note to clients.
“We doubt a weaker inflation print would result in much selling of the pound. The clear message from the BoE last week was that domestically generated inflation risks are rising. So, even a softening of inflation today on less sterling depreciation passthrough is unlikely to change the thinking much within the MPC (monetary policy committee).
The pound skidded to a three-week low against the dollar on Friday after the EU’s chief Brexit negotiator Michel Barnier warned a transition deal was far from assured.
Those comments, as well as broad strength in the dollar amid a sharp stock market sell-off, handed sterling its biggest weekly falls since October, as investors worried that Britain could leave the European Union in a disorderly manner.
It was around a cent above Friday’s low by 0850 GMT at $1.3868, up 0.2 percent on the day. Against the euro, sterling was flat at 88.89 pence.
“The UK CPI rate ... could play a decisive role as to the markets expectations (for BoE policy),” said IronFX currency strategist Peter Iosif. “We see the case for the pound to strengthen in the short term, as market expectations may grow.”
Editing by Matthew Mpoke Bigg