Investing.com - The pound hit the day’s highs against the dollar on Tuesday after data showing that the annual rate of inflation in the UK rose to a four year high last month, adding to concerns over a squeeze on the cost of living.
GBP/USD initially touched a high of 1.2717 and was at 1.2714 by 09.38 AM GMT, up 0.44% for the day.
The annual rate of inflation accelerated to 2.9% in May, the Office for National Statistics reported, above economists’ forecasts for a reading of 2.7%.
The ONS said food, energy and recreational costs all helped to push inflation up.
A major contributor to the rise in inflation was the increased cost of holidays abroad for British tourists due to the sharp fall in the pound since last year’s Brexit vote.
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.
With inflation outstripping wage growth the BoE has warned that living standards will fall as the weaker pound continues to feed through to shop prices.
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 0.38% at 0.8815 from around 0.8828 earlier.
Meanwhile, the dollar was slightly weaker as investors awaited the outcome of this week’s Federal Reserve policy meeting.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, eased 0.12% to 97.03, holding below Friday’s two-week highs of 97.47.
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.