Sterling surges more than 1% vs dollar after softer U.S. inflation

By Joice Alves

LONDON (Reuters) -Sterling jumped against the dollar after lower-than-expected U.S. inflation print for July dampened expectations for a 75 basis-point Federal Reserve rate hike in September.

Traders slashed bets the Fed will deliver a third straight 75 bps interest rate increase in September after U.S. consumer prices did not rise at all in July compared with June.

"The softer inflation print has given risk assets the new lease on life they were looking for, and seems to confirm the idea that some sort of Fed pause might take place in the final months of 2022," said Chris Beauchamp, chief market analyst at IG Group.

Against a weakening dollar, sterling jumped 1.4% higher to an eight-day high of $1.2250. It was up 1.2% at $1.2213 at 1317 GMT.

Against the euro, sterling edged up 0.16% to 84.44 pence, after hitting its lowest level since July 26 in earlier London trading as investors had turned their focus to the energy crisis hitting economic growth prospects in Britain.

According to press reports, Britain is making plans for organised blackouts for industry and households over winter when cold weather may coincide with gas shortages.

British consumer energy debt is already at an all-time high, with six million households owing an average of 206 pounds ($249) to providers, before bills leap in October and again in January, according to a survey.

"Reports that UK households face huge energy bills this winter is a reminder of the potential for a sharp drop in demand in the coming months... this is further negative news for the pound," said Jane Foley, head of FX strategy at Rabobank in London.

Press reports that Britain may face blackouts and that Norway may export less electricity due to low water levels in its reservoirs are also a negative for the pound, Foley added.

The pound is one of the worst G10 currencies performers this year, having weakened almost 10% against the U.S. dollar in 2022 amid a grim outlook for the UK economy.

Bank of England Deputy Governor Dave Ramsden told Reuters an economic slowdown could eventually force the central bank to cut interest rates.

In its August meeting, the BoE raised its benchmark interest rates to 1.75% from 1.25%, the sixth hike since late 2021, and warned of a recession by the end of the year that could last until 2024.

That was the biggest interest rate hike in 27 years in a attempt to smother surging inflation on track to top 13%.

Gross domestic product (GDP) figures for the UK on Friday will provide the next key reading on the state of its economy.

(Reporting by Joice Alves; Editing by Mike Harrison)