The British pound climbed toward $1.35 on Wednesday, marking its strongest level since February 2022, as traders reassessed the outlook for monetary policy following hotter-than-expected inflation data.
British pound strengthens to three-year high
The renewed strength in sterling reflects a sharp repricing of interest rate expectations, with investors scaling back bets on further Bank of England (BoE) cuts in the near term.
According to the latest figures, annual inflation accelerated to 3.5% in April, the highest since January 2024, and notably above both the 3.3% market forecast and the BoE’s own 3.4% projection. The data underscored persistent price pressures across the economy, particularly in energy, gas, and other regulated sectors, where recent price cap adjustments and global supply dynamics have fueled renewed cost increases.
Of particular concern to policymakers is the jump in services inflation — a key gauge of domestically driven price growth — which surged to 5.4% from 4.7%. This metric, often seen as a proxy for wage-driven inflation, suggests that underlying pressures remain elevated, complicating the BoE’s path toward its 2% target.
Response to the data
In response to the data, money markets now price in just one additional 25 basis point rate cut by the end of the year, down from earlier expectations of two or more. The probability of a rate cut at the BoE’s August meeting has fallen sharply, dropping to 40% from 60% earlier in the week. This marks a significant shift in sentiment, reflecting growing doubts about the central bank’s ability to ease policy without risking further inflation persistence.
The inflation surprise comes just weeks after the BoE delivered its first rate cut of the cycle in May, lowering the benchmark rate by 25 basis points. However, the decision was far from unanimous, with two members of the Monetary Policy Committee (MPC) voting for a larger cut to 4.0%, while two others argued for maintaining the current rate amid concerns over sticky inflation. The divided vote highlighted the delicate balancing act facing the BoE — weighing the need to support a slowing economy against the risk of entrenched price pressures.
Buoyed by improved risk sentiment
Beyond monetary policy, sterling has also been buoyed by improved risk sentiment and relative economic resilience in the UK compared to parts of the eurozone. A strong labor market and signs of consumer spending holding up have further contributed to the currency's recent momentum.
Still, uncertainty remains high as markets await further data, particularly on wages and retail spending, which could either reinforce or challenge the current policy path. Any signs of wage growth moderating or a sharp decline in household consumption could revive expectations of renewed easing — but for now, the pound continues to strengthen on the back of sticky inflation and a more hawkish market recalibration.
