Investing.com - Sterling extended gains against the broadly weaker dollar on Tuesday, after data showing that U.K. inflation hit the highest since mid-2014 in December, as investors braced for a key speech on Brexit by U.K. Prime Minister Theresa May.
GBP/USD was at 1.2162, up around 0.93% for the day, from around 1.2126 earlier.
The Office for National Statistics said the annual rate of inflation accelerated to 1.6% in December from 1.2% in November and above forecasts for a gain of 1.4%.
Consumer prices rose by 0.5% from a month earlier up from November’s 0.2% and ahead of forecasts for a 0.3% gain.
Underlying inflation rose by 1.6% on a year-over-year basis, compared to forecasts for a 1.5% increase.
Higher food prices, increasing air fares and a smaller fall in petrol prices than in December 2015, were behind the increase in inflation, the ONS said.
The increase has pushed inflation closer to the Bank of England’s 2% target.
In November the BoE forecast that inflation would rise above 2.7% by the end of 2017 as the weakening pound pushes up import prices.
On Monday, BoE Governor Mark Carney said Britain's recovery was increasingly reliant on consumer spending, making it vulnerable to the risk of a decline in spending power.
Markets were looking ahead to a speech by Prime Minister Theresa May later Tuesday, where she is expected to outline plans for Britain’s exit from the European Union.
Investors fear that May will outline plans for the U.K. to leave the single market and the customs union in order to prioritize immigration controls and bilateral trade deals in a so-called "hard Brexit".
The prime minister has indicated that she intends to trigger in March the formal process to withdraw from the EU, but has yet to spell out details of the governments negotiating strategy.
A spokeswoman for the prime minister said Monday that reports that she will unveil plans for a "hard Brexit” in the speech are "speculation".
But advance extracts of the speech, released by May’s office, said Britain will not seek a Brexit deal that leaves it "half in, half out" of the EU.
Sterling gained ground against the euro, with EUR/GBP sliding 0.25% to 0.8776, moving away from Monday’s 10-week highs of 0.8851.
Uncertainty over the incoming Trump administration’s plans for fiscal stimulus, deregulation and tax cuts,
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was down 0.77% to 100.75 as investors looked ahead to U.S. President-elect Donald Trump's inauguration on Friday amid a lack of clarity on his economic policies.
Sentiment on the greenback was also hit after a senior adviser to the President-elect warned Tuesday of the risks from a stronger dollar.