Sterling held modest gains on Wednesday after UK annual inflation rose to 2.9% in July, matching forecasts and easing fears the Bank of England will need to raise rates. GBP/USD traded near 1.3556 as traders also braced for tonight's FOMC minutes.
GBP/USD rose 0.18% to 1.3556, while EUR/USD added the same margin to reach 1.1597, as of 04:00 ET. The move came after UK inflation data landed in line with expectations, removing one source of pressure on the Bank of England.
UK inflation matches forecasts
Annual CPI climbed to 2.9% in July from 2.6% in June, matching the consensus though running slightly above the Bank of England's own 2.8% forecast. Utility price swings and earlier-than-usual clothing sales drove the increase, while easing food and airfares inflation offset some of the gain.
Core inflation held steady at 2.6%, and services inflation eased to 3.4%. According to Capital Economics: "Domestically generated inflation remains contained", said Ruth Gregory, the firm's deputy chief UK economist, who expects the Bank of England to hold rates at 3.75% through year-end and cut to 3% next year, well below the 4.25-4.50% that market pricing implies.
Carry demand keeps the pound supported
The contained core reading limited sterling's upside, but the pound is still drawing support from carry demand in a low-volatility environment. ING's Chris Turner called it one of the highest, volatility-adjusted currencies in the G10, with EUR/GBP expected to hold around 0.8550 near-term.
Tonight's release of FOMC minutes from the July meeting is the session's other gravitational pull. Fed policymakers voted 9-3 to keep rates unchanged at that meeting, and Turner said hawkish passages in the minutes could nudge the dollar modestly firmer, though he cautioned the release would not fundamentally change the outlook. ING's base case has the Fed skipping September, leaving Jackson Hole and the next CPI and payrolls prints as the real decision points. The DXY dollar index is expected to trade in a narrow 99.40-99.80 range through the day.
Euro faces its own pressure points
On the euro, rising European natural gas prices approaching year-to-date highs are keeping ECB hawks vocal. Chief Economist Philip Lane warned Tuesday that eurozone inflation could hold at 3% through year-end, with El Niño-driven food price pressures an additional risk into 2027. Final July eurozone CPI was expected at 2.9%.
Turner said the combination of FOMC event risk and climbing gas prices argues against pressing EUR/USD higher, flagging 1.1600-1.1620 as a level to fade rather than chase today. ING's broader call has the dollar softening modestly into year-end on a Fed pause, keeping both pairs on a gradual upward path, though a hotter-than-expected US inflation print or a hawkish tone in tonight's minutes would be key triggers to revisit that view.
Source: Investing.com
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