Inflation data supports Sterling

The higher than expected inflation data will increase pressure for a Bank of England interest rate increase in April and this will offer near-term Sterling support, although very strong buying looks unlikely with some immediate Euro support close to 0.6785.

The UK currency had a slightly firmer trend in early Europe on Tuesday ahead of the UK inflation data and strengthened after the data.

The UK inflation data was higher than expected with the headline annual rate increasing to 2.8% in February from 2.7% the previous month. The core rate held steady at 1.7%, but the Retail Prices Index (RPI) rose to an annual rate of 4.6% from 4.3%. The Bank of England will be particularly concerned over the RPI increase as it will increase the threat of rising wage costs which will feed through into higher inflation. Overall, there will be increased pressure for am interest rate increase in April.