Sterling traded with a subdued positive tone on Wednesday after UK inflation data for July came in largely as expected, a result that lessens immediate pressure on the Bank of England to lift interest rates.
By 04:00 ET (08:00 GMT) GBP/USD was trading 0.18% higher at 1.3556, while EUR/USD was up 0.18% at 1.1597. Those moves followed the publication of the UK consumer price index, which showed annual inflation rising to 2.9% in July from 2.6% in June - in line with market consensus and marginally above the Bank of England's own 2.8% forecast.
The July CPI increase reflected several offsetting elements. A notable swing in utility price inflation and earlier-than-usual clothing sales were the chief upward contributors, while inflationary pressures from food and airfares eased. Core inflation remained steady at 2.6% and services inflation cooled to 3.4%, a constellation of readings market participants interpreted as evidence that domestically generated inflation pressure is limited.
Ruth Gregory, deputy chief UK economist at Capital Economics, summed up the trajectory by saying: "Domestically generated inflation remains contained." She expects the Bank of England to keep its policy rate at 3.75% through the end of the year and to cut to 3% next year, a pace she notes is well below the 4.25-4.50% implied by market pricing.
That contained core reading capped sterling's upside on the day. ING's Chris Turner pointed out that the pound continues to attract carry demand in the current low-volatility environment, labeling it "one of the highest, volatility-adjusted currencies in G10." ING expects EUR/GBP to trade around 0.8550 in the near term.
Market attention is also focused on the U.S. Federal Reserve's meeting minutes from July, due for release tonight. At that meeting Fed policymakers voted 9-3 to leave rates unchanged. Turner commented that a few hawkish passages in the minutes could push the dollar modestly firmer, but he cautioned that the publication is not likely to be a "game changer."
ING's baseline expectation is that the Fed will skip a September move, with Jackson Hole and upcoming U.S. CPI and payrolls data serving as the next major decision points. ING projects the DXY to trade in a narrow 99.40-99.80 range through the day.
On the euro, rising natural gas prices in Europe - pushing toward year-to-date highs - have kept more hawkish voices at the European Central Bank audible. ECB Chief Economist Philip Lane warned that eurozone inflation could remain around 3% through the end of the year and noted El Niño-driven food price risks extending into 2027.
Final July eurozone CPI was expected at 2.9%. Turner advised caution on pushing EUR/USD higher given the combination of FOMC event risk and climbing gas prices, suggesting the 1.1600-1.1620 area is a level to fade rather than chase on rallies.
ING's broader view is for a modest dollar softening into year-end if the Fed pauses, which would support a gradual upward path for both GBP/USD and EUR/USD. The firm noted that a hotter-than-expected U.S. inflation print or a clearly hawkish tone in the Fed minutes would alter that outlook and prompt a reassessment of near-term currency trajectories.