British Pound Weakens After Softer Inflation

The British pound edged lower to $1.34 as traders digested a softer-than-expected inflation report ahead of the Bank of England’s monetary policy decision on Thursday. UK consumer price inflation unexpectedly held steady at 2.8% in May, below expectations of a rise to 3%. Core inflation increased to 2.6%, slightly under forecasts of 2.7%, while services inflation accelerated to 3.7% from 3.2%, broadly in line with expectations. The data suggested that underlying price pressures were less pronounced than feared, reinforcing the cautious, wait-and-see approach favored by some Bank of England policymakers. The central bank is widely expected to leave its benchmark interest rate unchanged at 3.75% this month as it balances still-elevated inflation against a weakening labor market and an economic contraction in April. Investors expect only a single rate increase this year, with a 25bps rise not fully anticipated until December.

The British pound climbed past $1.34, reaching its highest level since early June, as investors shifted toward riskier assets following the US and Iran’s preliminary agreement to end their three-month conflict. A framework deal, including the lifting of the US blockade and the reopening of the Strait of Hormuz, is set to be signed on Friday, though unresolved details remain around Iran’s nuclear program. With the Bank of England's policy meeting approaching on Thursday, markets broadly anticipate that interest rates will be maintained at 3.75% in a divided vote, as officials consider rising inflation against a deteriorating labor market and weak economic expansion. Traders have adjusted their expectations, now forecasting only a single rate increase this year, with a 25-basis-point rise not fully anticipated until December. Additionally, the outcome of Thursday's special election in Makerfield could impact perceptions of Labour's leadership direction and future economic policies.

The British pound traded flat just above $1.34, on track for its strongest weekly performance in nearly a month, as a weaker US dollar, spurred by optimism over a potential Middle East peace deal, provided support. US President Donald Trump hinted that a US-Iran agreement could be signed as early as this weekend, though Tehran stated no final decision had been reached. However, domestic economic concerns weighed on sentiment. Data showed the UK economy contracted by 0.1% in April, its first monthly decline since August, raising doubts about whether the Bank of England will proceed with rate hikes this year to tackle inflation. Investors are also focused on the June 18 Makerfield by-election, where Labour’s Andy Burnham, a potential challenger to Prime Minister Keir Starmer, could signal a shift toward more expansionary fiscal policies. Starmer currently faces internal party dissent and record voter dissatisfaction over his economic leadership.