British inflation unexpectedly jumped to its highest level in nearly four years in May, tightening the squeeze on consumers who now face the added worry of political uncertainty after last week’s inconclusive election.
The impact of the fall in the pound since last year’s Brexit vote made itself felt as consumer prices increased by 2.9 percent compared with a year earlier and its biggest increase since June 2013, the Office for National Statistics said.
Sterling was still looking wobbly after the shock result of Thursday’s UK general election, which left Prime Minister Theresa May short of a parliamentary majority that would have strengthened her hand as Britain prepares for Brexit negotiations with Europe.
The prospect of further political uncertainty due to the lack of an overall Conservative majority is likely to weigh on sterling in the short term.
On the other hand, the potential for “softer Brexit” rhetoric in a market that is already short on sterling could help support the currency over the medium-term.
The greenback was steady to firmer against the yen and the euro ahead of the Federal Reserve’s two-day policy meeting starting this afternoon.
With the U.S. central bank widely expected to raise interest rates, investors’ focus will be on any fresh hints on the pace of tightening in the months to come, and its assessment of the economy and outlook on inflation.
Investors will also be watching for any fresh details on the Fed’s plans for trimming its balance sheet.