UK Inflation Meets Forecasts, Sterling Steady as BoE Rate Hike Bets Cool

The British pound remained stable on Wednesday after official data showed UK inflation accelerated in July as anticipated, with a steady reading on core price pressures tempering expectations for further Bank of England interest rate hikes.

As of 04:00 ET (08:00 GMT), the pound was up 0.18% against the dollar at $1.3556, according to Investing.com data.

Inflation Data Meets Expectations

The UK's annual Consumer Price Index (CPI) rose in line with consensus forecasts, driven primarily by changes in utility prices and the timing of clothing sales. The reading was slightly above the Bank of England's own projection of 2.8%.

Key figures for July include:

• Annual CPI: 2.9%, up from 2.6% in June.
• Core CPI: Unchanged at 2.6%.
• Services Inflation: Eased to 3.4%.

Crucially for markets, the core inflation figure, which strips out volatile food and energy prices, held steady. Analysts noted this suggests underlying price pressures are not accelerating, giving the central bank more leeway to keep monetary policy on hold.

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Implications for the Bank of England

The stable core inflation reading has led analysts to believe the BoE can afford to wait before considering further rate increases. "Domestically generated inflation remains contained," said Ruth Gregory, deputy chief UK economist at Capital Economics, in a note cited by the source. Gregory expects the BoE to hold its key rate at 3.75% for the rest of the year before cutting it to 3.0% in 2027, a forecast significantly below current market pricing which implies rates between 4.25% and 4.50%.

While the data capped sterling's potential gains, analysts at ING noted the pound continues to find support from carry demand in a low-volatility environment, calling it "one of the highest, volatility-adjusted currencies in G10."

Broader Market Focus

Currency traders are also looking ahead to the release of minutes from the U.S. Federal Reserve's July policy meeting. While a handful of hawkish passages could provide a modest lift to the dollar, ING analysts do not see the release as a "game changer" for markets.

The euro was also slightly firmer, but faces headwinds from rising European natural gas prices. European Central Bank Chief Economist Philip Lane warned Tuesday that eurozone inflation could remain around 3% through the end of the year, keeping pressure on the ECB.