The pound dropped 0.036% to 1.3474 against the US dollar on Tuesday, weighed down by growing expectations of a Federal Reserve rate increase and a surprise acceleration in UK inflation data.
UK headline consumer-price inflation rose to 3.1% in August from 2.9% previously, driven largely by a 7% monthly surge in fuel costs. Food inflation remained soft at 1.1% year-on-year, while core services inflation was contained at 3.4%, according to InvestingPro data.
Francesco Pesole, an FX strategist at ING, noted that headline CPI projections are expected to climb toward 3.4% next month and peak near 3.7% early next year. The Bank of England is anticipated to hold rates into 2027, barring an energy-price spike that pushes inflation above a 4% threshold. ING flagged that its base case could be challenged if Brent crude sustained a move toward $110 a barrel.
Against the euro, the pound faced additional pressure. EUR/USD climbed 0.07% to 1.1549, and ING targeted a test of 1.150 as early as the coming week. The EUR/GBP pair was flagged for strength, with a target above 0.860 in the coming days.
On the US side, markets widely expect the Federal Reserve to deliver a 25-basis-point rate hike later on Wednesday, lifting the federal funds rate to 4%. Futures markets currently price in 23 basis points of tightening at the current meeting, 52 basis points by year-end, and 89 basis points by June, according to CME Group data.
ING’s projections suggest the Fed’s updated dot plot may show a median rate of 4.0% for both 2026 and 2027.
Pesole cautioned that a dovish-titled hike alone may not satisfy bond investors demanding monetary-policy discipline, particularly given the amount of tightening already reflected in swaps. “Any openness to further tightening can support the dollar by reinforcing policy credibility and countering any debasement trade risk premium,” he said.
In the UK, analyst Smith observed that there was nothing in the latest data to suggest the Bank of England needs to turn more hawkish, implying the inflation uptick may be transitory rather than a signal for tighter policy.
