Sterling remains under pressure this morning after the latest UK inflation figures came in slightly weaker than expected, reinforcing the view that the Bank of England is unlikely to rush into raising interest rates.
Headline CPI inflation slowed to 2.6% in the year to June, down from 2.8% in May and below the market expectation of 2.7%. On a monthly basis, inflation rose by just 0.1%, compared with 0.3% a year earlier. There were further signs that price pressures are easing, with goods inflation slowing from 2.0% to 1.7%, while services inflation, a measure closely watched by the Bank of England, eased from 3.7% to 3.6%. However, Core CPI, which excludes more volatile items such as food and energy, remained at 2.6%, slightly above the 2.5% markets had expected, suggesting some underlying inflation pressures remain.
The softer inflation data has weighed on the Pound, as lower inflation reduces the pressure on the Bank of England to tighten monetary policy further. While markets are still pricing in a 25 basis point rate increase by the end of the year, some economists now believe the Bank could keep interest rates unchanged throughout the rest of 2026 if inflation continues to move in the right direction.
That said, the outlook is far from straightforward. Many economists expect inflation to rise again over the coming months, potentially peaking between 3.3% and 3.5% as higher energy prices linked to the conflict in the Middle East feed through to households and businesses. There are also concerns that increased government spending under the new Burnham administration, together with still-sticky services inflation, could keep underlying price pressures elevated.
For now, the Bank of England is expected to look through any temporary rise in inflation and keep interest rates on hold, believing inflation will begin to ease again after this year’s expected peak. Investors will continue to monitor incoming inflation and labour market data closely, as any significant change could alter expectations for future interest rate decisions and, in turn, the direction of Sterling.
GBP/EUR 1.1713 GBP/USD 1.3365 GBP/AED 4.9106
GBP/AUD 1.9118 GBP/CHF 1.0851 GBP/CAD 1.8844
GBP/NZD 2.2988 EUR/USD 1.1396 GBP/ZAR 22.0654