Since 1992, two macroeconomic events had not occurred in Britain: price inflation has no exceeded 3% annually and the British Pound has not surpassed the $2 barrier. Both events were realized today, however, as an early-morning release of economic data indicated inflation in Britain was hovering around 3.1% and the British Pound quickly rose above 2 USD/Pound. Interest rate futures also witnessed an immediate correction, to the extent that the markets are now pricing in a British benchmark interest rate of 5.75% 6 months from now, .5% above the current rate. Meanwhile, US inflation statistics were dovish, suggesting the gap between British and US interest rates is set to widen, which should propel the Pound further upwards. The Financial Times reports:
There is little that is inevitable about currencies moving in line with expected interest rates and nothing in long-term trends that allows people to predict currency movements in connection with inflation and other variables. But on Tuesday, the currencies moved exactly as if they were linked to the inflation figures by an umbilical cord.
