The pound rose against the dollar on Wednesday after UK inflation data reinforced market sentiment that the Bank of England will hold interest rates on Thursday, in contrast to the start of the US policy easing cycle expected later on Wednesday.
The pound gained 0.49% to $1.3227, a session high, recovering Tuesday’s losses.
The Bank of England is expected to keep interest rates on hold at 5% on Thursday after official figures showed inflation held at an annual rate of 2.2% in August, unchanged from July, despite an acceleration in price growth in the services sector.
Meanwhile, industry data showed that sales growth at UK supermarkets slowed over the past month as consumers cut back on spending after their summer holidays.
“Looking at the range of underlying Bank of England services measures, we still see marginal improvement in the data despite the rise in the headline services measure, with core inflation continuing to decline. This is good news for the Monetary Policy Committee,” said Sanjay Raja, chief UK economist at Deutsche Bank, referring to the BoE’s Monetary Policy Committee.
“That said, today’s data will not be enough to trigger a surprise rate cut tomorrow,” Raja added.
Futures markets now imply a lower probability of a quarter-point cut, at 26%, from around 38% at the start of the week.
“The pound looks quite strong,” said Francesco Pesole, currency strategist at ING, adding that euro-sterling was unlikely to return to 85 pence for the time being.
The euro lost 0.25% against the pound to 84.235 pence.
“We still expect a slightly weaker end to the year for sterling, if the BoE starts to accelerate its rate cuts,” Mr Pesole said.
Beyond Thursday’s policy committee decision, markets are betting on cuts of 50 basis points in total by the end of the year.
The BoE cut rates by a quarter point last month.
Slow and steady progress in reducing inflation “should still justify a gradualist approach” in easing monetary policy, Lloyds Bank analysts wrote in a note.
“Arguably, what the Fed does and says today matters at least as much to the outcome of the November policy committee as what the policy committee says tomorrow,” they said.
The Federal Reserve is set to make its first interest rate cut in more than four years at 1800 GMT, with markets pricing in a 65% chance of a 50 basis point cut. FEDWATCH
The European Central Bank cut rates by 25 basis points last week.
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