Sterling Rises on Strong UK Inflation, Markets Eye Fed’s Interest Rate Decision
GBP
The British Pound strengthened during Wednesday’s London session following hotter-than-expected UK inflation data for August. At the time of writing, GBP|USD was nearing 1.3220, while GBP|EUR held around 1.1875. Volatility is expected later today with the Federal Reserve’s monetary policy decision at 18:00 GMT.
According to the Office for National Statistics, core Consumer Price Index (CPI) inflation, which excludes items like food and energy, rose by 3.6% in August, slightly above the forecasted 3.5% and up from 3.3% in July.
Services inflation, a key measure closely watched by the Bank of England (BoE), surged to 5.6% from 5.2%, which could dampen market expectations of an interest rate cut later this year.
Headline inflation came in as expected, rising 0.3% month-on-month and 2.2% year-on-year.
Looking ahead, all eyes are on the BoE’s monetary policy announcement tomorrow. Prior to the inflation data release, markets largely expected the BoE to hold rates steady at 5%. However, the recent data showing persistent inflation may lead to increased confidence that rates will stay unchanged through year-end.
EUR
With no major data releases in the eurozone today, EUR|USD is expected to remain in a narrow range ahead of the Federal Reserve’s announcement later this evening.
If the Fed opts for a larger-than-expected 50-basis-point cut, and markets interpret this as a sign of concern, the USD may weaken, benefiting currencies like EUR, JPY, and CHF, while higher-beta currencies such as NOK and SEK could see declines.
In the likely scenario of a more measured 25-basis-point cut, we expect EUR|USD to dip below 1.110 before gradually recovering in the coming days. By the time key US data releases, such as the PCE and jobs report, come through, EUR|USD could stabilise around 1.11-1.12.
On the European Central Bank (ECB) front, Governing Council member Gediminas Simkus suggested that a rate cut in October is unlikely, with markets pricing in just 7 basis points. The next reduction is expected in December, although a larger Fed cut today could increase pressure on the ECB to bring forward some easing measures.
USD
Markets are widely expecting the Federal Reserve to begin reducing interest rates for the first time in over four years. The key question now is the pace at which these cuts will happen. According to 30-day Federal Funds Futures data, there is a 65% probability of a 50-basis-point cut to bring rates down to 4.75%-5.00%, while the remaining odds favour a smaller 25-basis-point reduction.
The Fed’s shift towards policy normalisation appears to be driven by concerns over weakening labour demand rather than inflation, according to recent commentary from officials.
In addition to the rate decision, investors will closely watch the Fed’s updated dot plot, which outlines policymakers’ forecasts for interest rates in the medium and long term, along with economic projections. Fed Chair Jerome Powell’s press conference following the announcement will also be a key focus.
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