By Joseph Adinolfi, MarketWatch
U.K. high-court ruling will likely delay Brexit, also lifting the U.K. currency
The British pound on Thursday recorded its largest slump in more than two weeks after the Bank of England hinted it could raise interest rates if inflation accelerates too quickly.
Sterling rose 1.2% to $1.2455 late Thursday in New York, its largest daily jump since Oct. 18. By comparison, it traded at $1.2305 late Wednesday.
In its quarterly inflation report, the Bank of England warned "there are limits to the extent to which above-target inflation can be tolerated," which, market strategists said, opened the door to a possible rate increase next year. However, the central bank also noted that tightening policy to combat inflation could be costly.
The weakness in the pound has pushed consumer prices higher by increasing the cost of imported goods. According to the U.K. consumer price index, prices rose at an annualized rate of 1% in September. The BOE, which maintains an inflation target of 2%, projects that price increases will accelerate above its target in 2017.
The central bank also left its benchmark interest rate on hold, as was widely expected.
The inflation report "very much supports the view that the BOE isn't ready to consider lower rates any time soon," said Manuel Oliveri, a currency strategist at Credit Agricole. Typically, lower interest rates cause a currency to weaken by decreasing the return on deposits denominated in that currency.
Expectations for another BOE rate cut have waned in recent months as the impact of the Brexit vote on the U.K. has been relatively benign. On Thursday, a reading on services-sectoractivity came in stronger than expected, confirming that the BOE has little justification for another cut.
The pound also benefited from a ruling by the U.K. high court, (http://www.marketwatch.com/story/pound-leaps-after-court-delivers-blow-to-uks-brexit-plan-2016-11-03) which said the government of Prime Minister Theresa May would need to seek Parliament's approval before beginning the Brexit process. The ruling will likely delay the Brexit process, Oliveri said.
See:Brexit ruling: 5 things you need to know (http://www.marketwatch.com/story/brexit-ruling-5-things-you-need-to-know-2016-11-03)
And a strong reading on services sector activity in the U.K. confirmed that a feared economic slowdown has yet to materialize.
Elsewhere, the dollar dropped to a one-month low against the yen early Thursday before paring its loss somewhat. The greenback has been under pressure this week as polls showed Democratic nominee Hillary Clinton's leadover Republican rival Donald Trump narrowing, inviting investing uncertainty.
Clinton's lead over Trump has shrunk to 1.7 percentage points, down from more than 7 percentage points two weeks ago, according to the Real Clear Politics polling average (http://www.realclearpolitics.com/epolls/2016/president/us/general_election_trump_vs_clinton_vs_johnson_vs_stein-5952.html).
"The tightening of the race and renewed momentum by the Trump campaign has global investors greatly worried," said Boris Schlossberg, managing director of currency strategy at BKForex.
The buck was down 0.4% at Yen103.03 late Thursday. Meanwhile, the euro rose 0.1% to $1.1106.
The ICE U.S. Dollar index , a measure of the greenback's strength against a basket of rivals, fell 0.2% at 97.1650.
(END) Dow Jones Newswires
November 03, 2016 15:33 ET (19:33 GMT)
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