The British pound climbed above $1.33, reaching its highest level in seven months, largely buoyed by broad-based weakness in the US dollar, even as UK inflation data came in softer than expected.
Sterling holds at seven-month high
Headline consumer price inflation slowed to 2.6% year-on-year, down from previous readings, while services inflation — closely watched by the Bank of England — eased to 4.7%. The cooling inflation figures reduced the urgency for further monetary tightening, prompting traders to modestly increase their bets on rate cuts. Markets are now pricing in around 86 basis points of easing by the end of the year, with rising expectations for a possible fourth rate cut in December.
The latest data suggest that the Bank of England may have more flexibility to shift towards a more accommodative stance, especially as headwinds from global trade tensions and rising household costs continue to weigh on the UK’s economic momentum. Sluggish wage growth and cautious consumer spending are also adding to concerns about the durability of the recovery, reinforcing the case for potential monetary easing to support domestic demand.
US dollar index falls to a three-year low
Meanwhile, the US dollar index fell to a three-year low, pressured by increasing investor anxiety over the Federal Reserve’s political independence. Comments from President Trump criticizing Fed Chair Jerome Powell have stoked fears that the central bank could face heightened political interference, undermining its credibility at a critical time. Additionally, growing risks of a global trade war — fueled by escalating tariff threats between major economies — have further dampened sentiment toward the greenback, prompting investors to seek alternatives like the pound and other major currencies.
The combination of a softer inflation backdrop in the UK and a rapidly deteriorating outlook for the US dollar is giving sterling renewed strength. However, analysts caution that the pound's rally could be vulnerable if domestic growth weakens further or if political uncertainty in the UK intensifies later in the year.
