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LONDON – The pound fell against the dollar on Wednesday after data showed British inflation soared to 9%, its highest level in 40 years.

At 0846 GMT, the pound fell 0.9% against the US dollar at $1,23820.

The drop wipes out most of Tuesday’s gains as the pound hit its highest level since May 5.

Strong labor market data had bolstered expectations that the Bank of England would have to raise interest rates further, but the latest inflation figures are fueling fears that the threat of a recession could dampen the central bank.

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“Yesterday it looked like wage growth and unemployment were so low that the bank had more leeway,” said Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown.

“Now the blindingly high costs to consumers will lead to a decline in consumer purchasing power, which will have a major impact on output in the UK economy.”

Consumer price inflation reached 9% in April, making UK inflation the highest of Europe’s five largest economies and almost certainly the Group of Seven, with Canada and Japan not yet reporting April figures. Neither will match UK price growth.

“Obviously the bank doesn’t want to be so aggressive as to push the UK into a deep downturn, but it knows it needs to pull some levers to keep inflation under control,” Streeter said.

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The fact that the US Federal Reserve is expected to be more aggressive in its rate hikes also makes the dollar more attractive, Streeter said, further exacerbating the pound’s weakness as traders flee riskier assets.

Against the euro, the pound rose 0.7% to 84.08 pence.

British Foreign Secretary Liz Truss said on Tuesday she plans to introduce legislation in the coming weeks to make changes to the Northern Ireland protocol, which was part of the Brexit divorce deal.

According to a note from ING strategists, Brexit-related risks surrounding changes to the Northern Ireland protocol and the potential for a trade war with the EU pose a significant downside risk to the pound, which they expect to fall over the summer.

(Reporting by Lucy Raitano; editing by Alison Williams)

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This post Pound falls as UK inflation hits 40-year high

was original published at “https://financialpost.com/pmn/business-pmn/pound-falls-as-uk-inflation-hits-40-year-high”