Pound fluctuates as UK inflation returns to target

The pound traded a little erratically on Wednesday as markets digested the UK’s latest inflation figures.

Sterling is rangebound so far this morning, with GBP/EUR flat at €1.1838 and GBP/USD muted at $1.2705. GBP/CAD is rangebound at CA$1.7424, while GBP/AUD and GBP/NZD hold steady at AU$1.9054 and NZ$2.0712, respectively.

Looking ahead, will the Bank of England’s (BoE) latest interest rate decision infuse additional volatility into the pound today?

What’s been happening?

Trade in the pound was mixed during yesterday’s European session, following the publication of the UK’s latest consumer price index.

While inflation cooled in May, returning to the Bank of England’s target rate of 2% for the first time since July 2021, signs of sticky services inflation initially buoyed Sterling on Wednesday morning.

However, the pound reversed the bulk of its gains by the end of the session amid an uptick in bets for an August interest rate cut from the BoE.

Meanwhile, the US dollar faced resistance on Wednesday amid growing bets that the Federal Reserve will begin cutting interest rates in September.

However, the drop in USD remained limited in scope as a cautious market mood helped to underpin the safe-haven currency.

At the same time, the euro was muted yesterday, as a lull in Eurozone economic data left the single currency vulnerable to French political jitters.

What’s coming up?

Turning to today’s session the focus will no doubt be on the BoE’s latest interest rate decision.

Policymakers are widely expected to leave interest rates on hold today, with markets placing the odds of a cut at just 5%.

The BoE’s forward guidance may also prove limited as the bank will be reluctant to say anything that may be seen as influencing the upcoming UK election. However, we could see the pound face some pressure if BoE Governor Andrew Bailey alludes in any way to a potential cut in August.

For USD investors the focus will be the latest US initial jobless claims. If new unemployment claims remained elevated last week the US dollar could face some pressure later this afternoon.

Closing out today’s session will be the publication of the Eurozone’s latest consumer sentiment index. Will a slight improvement in sentiment this month help to prop up demand for the euro?