Sterling reversed earlier losses on Thursday and moved higher after Bank of England policymaker Michael Saunders said the central bank could decide to halt its bond-buying programme early due to an unexpectedly sharp rise in inflation.
Money markets repriced interest rate expectations after his comments to price some 18 basis points of policy tightening by June 2022 compared to just 10 bps before and two-year gilt yields rose six basis points to the highest since mid-June .
The pound rose 0.2% against the dollar at $1.389, having earlier fallen as far as $1.381 but by 1130 GMT it was trading flat at $1.386.
It also firmed against the euro to 85.2 pence, up 0.2% on the day, though it stayed off the 3-1/2-month highs touched on Wednesday.
Saunders’ comments add to signs of a change in stance at the BoE, where departing chief economist Andy Haldane had until recently been the sole voice advocating considering an end to pandemic-time stimulus.
On Wednesday, BOE Deputy Governor Dave Ramsden said inflation could hit 4% this year, forcing the bank to reverse monetary stimulus sooner than expected.
“Sterling bulls has been pushed back in recent weeks by a dovish BoE and specifically by the caution of BoE Governor (Andrew) Bailey. (But) over the past 24 hours, we have had to digest strong CPI data, a healthy labour market report and hawkish comments from two MPC members,” Rabobank strategist Jane Foley said.
“The latter in particular are bolstering the confidence of the sterling bulls.”
Saunders spoke after data showed 356,000 jobs added in June from May and the fastest headline wage growth in the year to May since records began in 2000. A day earlier, data showed inflation had risen 2.5% in the 12 months to June, well above the central bank’s target.
However, the pound hasn’t shaken off fears that Britain’s decision to fully reopen the economy from July 19 could prove premature, given the rapid spread of the Delta variant of the coronavirus.
That anxiety is tempering any optimism over the economic bounceback.
“Sterling feels like it’s pricing in that the economy is reopening too early,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.
“A few months back it looked like the UK was way ahead in term of vaccinations but what the market was not anticipating was the rise in the Delta variant,” Onuekwusi added.
There are concerns too about the end of job subsidies, which supported 2.4 million jobs at the end of May but are being phased out by end-September and will likely boost unemployment again.