Pound Rises After BoE Holds Rates and Warns on Inflation Risks

Sterling strengthened to $1.34, its highest level since July 20, after the Bank of England voted 6-3 to keep the Bank Rate unchanged at 3.75%, with markets having expected a narrower 7-2 split. The BoE said the impact of higher energy prices remains uncertain and warned that inflation is likely to rise later this year as energy costs feed through to the economy. It added that the risk of persistent inflation has increased, with the outlook now tilted to the upside, although developments in the Middle East could still materially alter the outlook. Meanwhile, fresh US airstrikes on Iran in response to attacks on American forces across the Middle East lifted oil prices and weighed on risk sentiment. The Federal Reserve also added to uncertainty on Wednesday by leaving interest rates unchanged despite three FOMC members dissenting in favor of a rate hike.

Sterling weakened to $1.334 on Thursday as investors awaited the Bank of England's policy decision later in the day. While the BoE is widely expected to leave interest rates unchanged, markets will closely watch the voting split and any guidance on the future policy path. Recent data showed UK inflation slowed to a 15-month low of 2.6% in June, below the BoE's forecast. However, higher energy prices have fueled concerns that inflationary pressures could re-emerge in the coming months. Meanwhile, fresh US airstrikes on Iran in response to attacks on American forces across the Middle East lifted oil prices and weighed on risk sentiment. The Federal Reserve also added to uncertainty on Wednesday by leaving interest rates unchanged despite three FOMC members dissenting in favor of a rate hike.

The British pound traded around $1.33 on Wednesday, little changed from the previous session and hovering near its weakest level in almost a month, as investors awaited policy decisions from the US Federal Reserve later in the day and the Bank of England on Thursday. The Fed is widely expected to leave interest rates unchanged, though markets still price in roughly a 30% chance of a 25-basis-point hike. In the UK, the BoE is also expected to keep its Bank Rate at 3.75%, with investors focusing on the vote split for signals on the future policy path. Recent data showed UK inflation slowed to a 15-month low of 2.6% in June, below the BoE's forecast, supporting expectations of a pause. However, concerns persist that the recent surge in energy prices could rekindle inflationary pressures in the months ahead as higher costs feed through to households and businesses.