UK bank notes
UK bank notes

The pound spiked to a 2017 high versus the dollar and strengthened further versus the euro on Tuesday (12 September), after UK inflation spiked to a four-year high, fuelling expectation of an interest rate hike.

At 3:02pm BST, the pound was up 0.73% versus the greenback, changing hands at $1.3259, having risen as high as $1.3271; the sort of levels it dropped to in February last year, after former UK Prime Minister David Cameron set a date of 23 June for the EU referendum in parliament.

Earlier, data released by the Office for National Statistics (ONS) on Tuesday (12 September), inflation as measured by the Consumer Price Index (CPI) rose 2.9% year-on-year last month, compared with the 2.6% growth recorded in July, and above analysts' expectations for a 2.8% reading.

It marked only the second time inflation has hit the 2.9% mark in four years, the first being in May 2017.

On a monthly basis, inflation climbed 0.6%, after slipping 0.1% in the previous month. Analysts had expected a 0.5% increase. The data triggered speculation over what the Bank of England might do at its next Monetary Policy Committee (MPC) meeting due on Thursday (12 September).

"The number is simply a nightmare for the BOE," said Naeem Aslam, chief market analyst at Think Markets UK.

"The members of the policy makers are already split in their decision and now the market would expect more hawkish tone on Thursday. However, it is important to keep in mind that this kind of inflation which is not supported by higher wages is simply a bad inflation."

However, Kit Juckes, head of forex at Societe Generale and IBTimes UK columnist, said the inflation data is not likely to change the stance of the BOE.

"The MPC will be back to full strength on Thursday with the arrival of Sir David Ramsden. We expect him to vote for no change and the other members to repeat their August votes, resulting in a 7-2 vote."

The sterling also strengthened against the euro rising to €1.1126 at one point, up 0.69% intraday.

Mihir Kapadia, chief executive officer of Sun Global Investments, said the pound is weighed down by its own problems from the hazy Brexit negotiations against the euro, regardless of the intraday uptick.

"In the near term, the euro is threatening to reach parity with the sterling, as investors await the European Central Bank's decision on stimulus in October."