Daily currency update
UK inflation data for August came in exactly as expected, keeping the country at the top of the table among its major peers. Headline CPI held steady at 3.8% year-on-year, unchanged from July, while core CPI eased slightly to 3.6% from 3.8%. Sterling softened on the release as markets weighed the prospect of further Bank of England cuts later this year.
The key measure of services inflation, closely tracked by the BoE as a sign of domestic price pressures, fell to 4.7% from 5.0%, pointing to some cooling. While the data leans dovish, inflation remains more than double the Bank’s 2% target, leaving policymakers to balance softening wage growth against persistent household price pressures.
This mix of high inflation and slowing growth points to a sterling-unfriendly policy backdrop, with further fiscal tightening likely in November’s Budget. However, some major banks – including HSBC – argue the BoE may now pause its cutting cycle. If so, the pound could find support from the UK’s relatively high bond yields, which continue to attract foreign capital inflows.
Key movers
US retail sales beat expectations on Tuesday, suggesting consumer spending remains resilient despite signs of a cooling labour market. However, the upside surprise offered little support to the dollar, with weakening jobs data and tariff-driven price pressures raising concerns for future performance.
Focus now turns to the Federal Reserve’s interest rate decision later today, where a 25bps cut is fully priced in. Markets will be watching Chair Powell’s comments and the updated dot plot for clues on the pace of easing, with investors currently anticipating around 68bps of cuts over the rest of the year. Speculation also lingers over the possibility of a larger 50bps move, amid political pressure on the Fed’s independence.
The US dollar index is trading near its lowest level since early July and is down almost 11% year-to-date, as markets brace for potential further weakness.
Expected Ranges
GBP/USD: 1.3575 – 1.3665 ↑
GBP/EUR: 1.1490 – 1.1530 ↓
EUR/USD: 1.1820 – 1.1885 ↑
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