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The pound has risen above $1.25 against the dollar for the first time in a month, as signs of higher inflation in the UK continued to drive up the value of the currency and the dollar continues to wilt.

Sterling gained 0.2 per cent in early trading in London to reach $1.2505, a four-week high. It remained at a two-week high against the euro, up 0.1 per cent to €1.1561.

The pound rose nearly 1 per cent – a relatively large daily gain – on Tuesday after official figures revealed that UK inflation was above the Bank of England’s target, leading to speculation that interest rates could rise sooner than expected.

Consumer prices were 2.3 per cent higher in February compared to the same period the previous year, the Office for National Statistics said, ahead of expectations of a 2.1 per cent gain and well above the Bank’s 2 per cent target.

But analysts have said that uncertainties around the impact of Brexit on the UK economy could still dominate the Bank’s thinking over when it hikes rates. Jane Foley, an analyst at Rabobank, said in a note:

Currently, we see little risk that the MPC will be in any rush to hike interest rates. Political uncertainty is likely to feed the Bank’s reluctance to act particularly if the EU push back hard against PM May’s proposals once the Brexit negotiations commence.

This uncertainty, however, could create additional cost push inflation if sterling’s decline extends. We would therefore expect that the BoE could choose to step up hawkish commentary to control any further bout of weakness in the pound.

(Chart: Bloomberg)

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