The pound weakened against the dollar on Wednesday morning, trading at 1.3474, a drop of 0.036%, as traders priced in an upcoming Federal Reserve rate hike and a recent uptick in UK inflation figures.
The euro also edged higher against the greenback, rising 0.07% to 1.1549.
Market participants widely expect the Fed to deliver a 25 basis point rate increase later on Wednesday, lifting the target rate to 4%. Swaps markets currently price in 23 basis points for the upcoming meeting, 52 basis points by year-end, and 89 basis points by June, according to data.
UK headline consumer price inflation accelerated to 3.1% in August from 2.9% in July, driven primarily by a widely anticipated 7% monthly jump in fuel costs. Despite the overall rise, food inflation remained soft at 1.1% year-on-year, while core services inflation held steady at 3.4%.
Francesco Pesole, FX strategist at ING, said a dovish Fed hike may fall short of reassuring bond investors seeking monetary policy discipline, especially given the amount of tightening already reflected in swaps pricing.
Pesole added that any signals of further tightening from the Fed could support the dollar by reinforcing policy credibility and countering debasement-trade risk premiums.
On the UK side, analyst Smith noted that Wednesday's data offered no indication the Bank of England needed to adopt a more hawkish stance, pointing to subdued food inflation and contained core services pressure.
Looking ahead, ING projects UK inflation will climb toward 3.4% next month and peak near 3.7% early next year, with the Bank of England expected to hold rates into 2027 unless energy prices spike above the 4% inflation threshold.
Ing also flagged a base-case risk scenario if Brent crude rises sustainably toward $110 per barrel, which could add further upward pressure on the inflation outlook.
