FX Focus: Pound surges after inflation breaches Bank of England's target

The pound climbed to multi-week highs against its main rivals on Tuesday (21 March), after data showed the rate of inflation soared past the Bank of England's target in February.

Sterling jumped to a three-week high of US$1.2474 against the dollar and a two-week high of €1.1553 versus the euro after the inflation report, before slipping back slightly. However, by early afternoon, it remained 0.84% and 0.21% higher against the dollar and the euro respectively, trading at $1.2460 and €1.1528.

According to data released by the Office for National Statistics, inflation rose 2.3% year-on-year last month, up from the 1.8% reading recorded in January and higher than the 2.1% figure analysts forecast. The increase was the fastest on record since September 2013.

"This data has been good news for the pound, which has surged to fresh highs," said Kathleen Brooks, research director at City Index.

"Going forward, the theme of rising prices could go two ways. Firstly, if oil prices continue to fall then we could see inflation pressures start to recede, which may boost consumer stocks and weigh on the pound. If, however, we continue to see prices rise and wage growth disappoint, then we could see further upward pressure on the pound."

Andrew Sentance, senior economic adviser at PwC, added: "It is no surprise to see inflation picking up further and going above 2%. This is the product of increasing global price pressures and the weakness of the pound.

"Higher inflation will squeeze consumer spending to some degree but if the economy remains resilient, the Bank if England should be considering a rise in interest rates to counter the surge in inflation."

Elsewhere, the euro surged 0.64% against the dollar, trading at $1.0808, after a number of polls showed French presidential candidate Emmanuel Macron performing best in a debate on Monday.

"Macron is seen as the more market friendly candidate, particularly among the two front runners, with Marine Le Pen threatening to pull France out of the euro," said Oanda's senior analyst Craig Erlam.

"While Le Pen still leads in first-round polls, Macron is seen by most polls to have a comfortable lead in the second round."

Meanwhile, the dollar was broadly flat against the majority of its rivals, with the exception of the Swiss Franc and the Canadian dollar, falling 0.55% and 0.45% to CHF0.9940, and CAD$1.3277 respectively.