Investing.com - The pound rose on Tuesday after data showing that UK annual inflation hit a four-year high last month, while the dollar slipped lower against a currency basket as investors awaited the outcome of this week’s Federal Reserve policy meeting.
GBP/USD was trading at 1.2731 by 07.44 AM ET, up 0.55% for the day.
The annual rate of inflation in the UK accelerated to 2.9% in May, the Office for National Statistics on Tuesday said as the weaker pound continued to feed through to shop prices.
Inflation is now rising faster than the Bank of England expected. In its May inflation report the bank said it expected inflation to peak at 2.8% in the fourth quarter of this year.
Despite this the BoE is expected to keep interest rates on hold when it announces its latest monetary policy decision on Thursday.
The inflation data comes amid political upheaval in the UK in the wake of last week’s shock election result, which has given rise to questions over how the government will proceed with its plans to exit the European Union.
Sterling was higher against the euro, with EUR/GBP down 0.47% at 0.8808 from around 0.8828 earlier.
Meanwhile, the dollar was slightly weaker ahead of the start of the Fed’s two day policy meeting later Tuesday, where the central bank is widely expected to deliver its second rate hike so far this year.
With a rate hike largely priced in investors will be watching for indications on the pace of further tightening in the second half of the year and further details on the Fed’s plans for reducing its balance sheet.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, eased 0.15% to 97.00, holding below Friday’s two-week highs of 97.47.
The euro inched higher, with EUR/USD edging up 0.07% to 1.1212.
Against the yen, the dollar was a touch higher, with USD/JPY at 110.06.
The Canadian dollar remained close to the two month highs hit overnight, with USD/CAD last at 1.3275.
The loonie was boosted after a senior policymaker at the Bank of Canada said Monday that it would assess whether low interest rates would still be needed as the economy continues to grow.