Sterling Rises as Softer U.S. Inflation Data Weighs on Dollar

The British pound strengthened on Wednesday, capitalizing on a broad-based decline in the U.S. dollar after a key inflation report came in softer than anticipated. The GBP/USD currency pair rose 0.10% to trade at 1.3404, while the euro also saw gains against the dollar.

U.S. CPI Data Drives Market Moves

The primary catalyst for the dollar's weakness was a benign U.S. Consumer Price Index (CPI) print for June. According to Alvise Marino, a strategist at UBS, this report "outweighed the USD-supportive impact of renewed geopolitical tensions in the Middle East, leaving the dollar under pressure."

Despite the soft data, Federal Reserve officials maintained a hawkish stance. Fed Chair Kevin Warsh stated policymakers have "no tolerance for persistently elevated inflation." Markets are still pricing in a 25-basis-point rate hike by the end of the year, though the expected timing has been pushed back from mid-September to October 29, according to the source. Investors are now awaiting the U.S. Producer Price Index (PPI) for further signs of a disinflationary trend.

Sterling Gains on External Factors

Analysts noted that the pound's advance was not driven by domestic UK fundamentals. Recent weakness in UK government bonds, or gilts, was described by UBS strategist Benjamin Jarrett as being "global in nature rather than being driven by domestic factors," with oil prices being a dominant influence.

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UBS said it remains "comfortable with our positive stance on GBP," citing factors such as net short positioning and fiscal commitments from the incoming prime minister. The bank forecasts GBP/USD will trade at 1.32 by the end of the third quarter.

Broader Currency Outlook

The euro's movement also tracked the dollar's retreat. However, analysts at ING flagged that rising European natural gas prices, linked to tensions in the Gulf, could cap the upside for the single currency. ING expects the EUR/USD pair to "struggle to break above the 1.1460/70 area."

Despite the immediate pressure on the dollar, UBS advised that Fed tightening risks "have been reduced but not eliminated" and that it favors "buying USD dips." A sustained reversal of the dollar's bullish trend would likely require either a further series of soft U.S. inflation reports or a de-escalation of geopolitical tensions impacting oil prices, the bank noted.