The British pound held steady on Wednesday after UK inflation data for July aligned with forecasts, tempering expectations for further Bank of England (BoE) rate hikes while reinforcing bets on easing next year.
Sterling traded 0.18% higher at $1.3556 against the dollar by 08:00 GMT, extending gains from Tuesday. The euro also edged up 0.18% to $1.1597, reflecting a broadly stable European session.
UK annual consumer price inflation rose to 2.9% in July, up from 2.6% in June and matching both market consensus and the BoE’s own forecast of 2.8%. Core inflation remained unchanged at 2.6%, while services inflation eased to 3.4%. The data suggested domestically generated price pressures remained contained, according to Ruth Gregory, deputy chief UK economist at Capital Economics.
The figures reduced immediate pressure on the BoE to tighten policy further, though analysts still expect rates to be held at 3.75% through the end of the year. Capital Economics projects the first cut to 3% in 2025, a view below market pricing that had implied rates could fall to 4.25%-4.50% by then.
ING analyst Chris Turner characterized the pound as one of the least volatile currencies in the G10 group on a volatility-adjusted basis. He also downplayed the significance of the Federal Open Market Committee’s July meeting minutes, stating they were not a "game changer" for near-term policy expectations.
Elsewhere, European Central Bank chief economist Philip Lane warned that eurozone inflation could remain around 3% through year-end, underscoring the persistence of price pressures in the region. Rising European natural gas prices, approaching year-to-date highs, added to the backdrop of elevated energy costs.
The US Dollar Index was expected to trade within a narrow range of 99.40 to 99.80, while the euro-pound cross was seen holding around 0.8550 in the near term. Analysts noted that utility price swings and early clothing sales contributed to the UK’s July inflation reading, offsetting softer food and airfare costs.
Looking ahead, risks to inflation include potential El Niño-driven food price pressures extending into 2027, according to market watchers.
