• The Pound (GBP) strengthened against the US Dollar (USD) after UK inflation data exceeded expectations, with headline inflation holding at 2.2% and core inflation rising to 3.6%.
• The Bank of England (BoE) is expected to hold interest rates steady, reinforcing GBP’s upward momentum, while the Fed is anticipated to cut rates, potentially pressuring USD.
• In a surprise move, the Federal Reserve cut interest rates by 50 basis points instead of the expected 25bps, aiming to maintain economic stability without triggering recession fears.
• Eurozone inflation dropped to a three-year low of 2.2%, raising expectations of further easing from the European Central Bank (ECB), weakening the Euro (EUR).
• GBP/EUR could gain further if the BoE maintains a hawkish stance, while a dovish tone from ECB President Christine Lagarde may place additional pressure on the Euro.

GBP: Pound Ticks Up Following UK Inflation Data

On Wednesday, the Pound US Dollar (GBP/USD) exchange rate edged higher after the release of the UK’s latest inflation figures. By midday, GBP/USD was trading around $1.3214, up approximately 0.4% from the day’s start. The pound (GBP) gained strength across most currencies, supported by an unexpected inflation report.

The Office for National Statistics (ONS) revealed that headline inflation remained steady at 2.2% in August, defying expectations of a slight drop to 2.1%. Core inflation also exceeded forecasts, rising from 3.3% to 3.6%, above the anticipated 3.5%. Additionally, the Bank of England’s (BoE) preferred inflation measure—services inflation—climbed from 5.2% to 5.6%. These figures increased expectations that the BoE would hold interest rates steady, driving the pound’s upward momentum.

Sam North, Market Analyst at eToro, remarked: “UK services inflation slightly exceeded expectations in August at 5.6% year-on-year, prompting a brief hawkish lift in GBP. However, this is unlikely to significantly affect the BoE’s policy decision, with an unchanged Bank Rate still expected.”

Meanwhile, the US Dollar (USD) experienced lackluster trading as investors awaited the Federal Reserve’s imminent interest rate decision. The market anticipated a rate cut, potentially putting pressure on the USD. However, a smaller 25 basis-point cut rather than the widely expected 50 basis points could help mitigate the dollar’s losses.

USD: Fed’s Unexpected 50bps Cut Shocks Markets

In a surprising move on Wednesday, the Federal Reserve implemented a 50 basis-point cut. Initially considered unlikely, this cut surprised many, as only a week prior, the odds of such a move were just 11%. Despite the unexpected cut, markets remained stable, with the S&P500 and USD returning to previous ranges.

Fed Chair Jerome Powell emphasized the move as part of a “recalibration” to maintain economic stability, avoiding any panic about an imminent recession. “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained,” Powell said.

The cut comes amid growing confidence in inflation control, as recent CPI data showed inflation at 2.5%, near the Fed’s 2% target. Economic growth is projected to continue at a 2% pace, while unemployment, currently at 4.2%, is expected to rise slightly but remain stable at around 4.4% over the next 18 months.

EUR: Euro Struggles After Inflation Drop

The Euro (EUR) faced pressure on Wednesday after inflation in the Eurozone fell to a three-year low of 2.2%, down from 2.6%. This reinforced expectations of further easing from the European Central Bank (ECB), especially after comments from ECB official François Villeroy de Galhau hinted at continued monetary policy adjustments. Growing bets on ECB rate cuts have weighed down the Euro.

GBP/EUR Outlook: BoE’s Decision Could Boost Pound Further

Looking ahead, the Pound Euro (GBP/EUR) exchange rate could gain additional momentum if the BoE delivers a hawkish interest rate decision. While markets expect the BoE to leave rates unchanged, any hints that the central bank is in no hurry to cut rates could bolster the pound. Meanwhile, Euro investors will be watching ECB President Christine Lagarde’s comments closely. If she strikes a dovish tone, the Euro could face further losses, allowing GBP/EUR to climb even higher.