Sterling edges up after hotter-than-expected UK inflation

The British pound edged higher toward 1.35 against the dollar on Thursday after UK inflation came in hotter than expected, reinforcing the view that the Bank of England will proceed more cautiously with further easing.

July’s consumer price index rose 3.8 percent year-on-year, the fastest pace since January 2024 and above economists’ forecasts. The surprise acceleration follows a string of resilient economic data releases that had already tempered expectations for aggressive rate cuts.

Markets have quickly adjusted to the inflation news. Traders now price in only about 10 basis points of easing by December, effectively less than a 50 percent chance of another cut this year. Instead, markets see the next quarter-point reduction as more likely in early 2026, reflecting a growing belief that policymakers will wait for clearer evidence of disinflation before resuming rate cuts.

This adjustment comes on top of recent stronger-than-expected GDP and labor market figures, which showed growth holding up and job losses smaller than anticipated. With wages still growing faster than the BoE’s 2 percent inflation target and consumer demand proving resilient, many analysts argue that additional rate cuts this year could risk undermining inflation control efforts and credibility.

The latest inflation print places the central bank in a delicate position. The Bank of England cut rates narrowly last month in a 5–4 vote, highlighting divisions within the Monetary Policy Committee over how much further policy should be loosened. The upside inflation surprise further reduces the scope for near-term easing, with policymakers likely to emphasize a data-dependent approach in upcoming speeches and minutes.

Looking ahead, investors will be watching August inflation and retail sales data closely for confirmation of whether price pressures remain elevated or start to ease again. Any sign of stickiness could push expectations for rate cuts even further into 2026, potentially giving the pound more short-term support.