Why has the British Pound increased in value today?

As we can see from the below exchange rates, the British pound has reacted favourably to today's inflation data:

GBP/USD is 0.07 pct lower than seen at last night's close at 1.5974.
GBP/EUR is 0.18 pct higher at 1.1807.

(Please note that your bank will access the above market rates but will sell on currency to you at another rate; this spread is where they make their money. However, an independent FX provider can also access currency at the above rates BUT will actively undercut the offer made by your bank, thus delivering you up to 5% more currency. Please find out more here.)

But, why has the British pound sterling increased in valued today? How does inflation data influence the pound, and what does the Bank of England have to do with all this?

UK inflation has today been confirmed to be stubbornly high.

Keeping inflation low remains the Bank of England's number one objective; and historically central banks fight inflation by raising interest rates to help keep a lid on the amount of money flowing through the economy.

When money becomes expensive to borrow people will borrow less, thus spend less and thus the upside pressure to prices will be contained.

Currency markets are therefore betting that the high inflation rate will see the Bank of England forced to raise the interest rate sooner than they would like.

AND, high interest rates mean that those with savings in the bank get more bang for their buck.

This is when large amounts of international money starts flowing into the UK - people will look to take advantage of the improved return that holding UK cash offers.

It is this same flow that aided the Australian dollar in the wake of the international financial crisis - high interest rates in Australia saw people borrow UK cash at a low interest rate and snap up Aussie cash in order to take advantage of the return that cash offered.

The bet amongst market players is now that the people will see the UK offer the same kind of returns; thus driving up the value of sterling.