The pound largely disregarded softer-than-expected British inflation data on Wednesday, remaining stable against both the dollar and the euro as traders awaited upcoming labor market data and the Bank of England (BoE) meeting. Sterling dipped marginally against the dollar to $1.3411 and was broadly steady at 86.48 to the euro after briefly hitting a near-two-week low. British inflation for May held at 2.8%, unchanged from April's 13-month low and below forecasts from economists and the BoE.
The BoE is widely expected to maintain interest rates at 3.75% during its Thursday meeting. However, some dissent is anticipated, with one or two of the nine rate-setters, including chief economist Huw Pill, expected to vote for a rate hike. Markets currently project one BoE rate increase this year. If this expectation shifts, it could weigh on the pound.
Thursday is crucial for British markets, featuring both the BoE's rate decision and significant labor market data, which will influence central bank policy for the rest of the year. Additionally, a key by-election is scheduled. ING currency analyst Francesco Pesole suggested that if Andy Burnham wins the election, a political risk premium might be factored into the pound.
Money markets now imply only one BoE rate hike by the end of 2026, a reduction from earlier forecasts of two hikes. Analysts like Andrew Wishart from Berenberg noted that falling oil prices, due to a US-Iran interim agreement that reopened the Strait of Hormuz, align with a more benign inflation scenario, reducing the urgency for near-term tightening. Brent crude fell over 5% to $82.75 per barrel following the deal.
The pound's stability conceals underlying cross-currents, including lifted global risk appetite from the US-Iran deal and lower energy prices. However, domestic challenges persist, such as the UK public sector net debt standing at 94.2% of GDP in April 2026 and a borrowing gap of $23 billion year-on-year, along with political uncertainties from the Makerfield by-election.
