Sterling wobbles as inflation hits expectations with focus now turning to the central banks

Daily Currency Update

UK inflation data for August came in exactly as expected, keeping the country at the top of the table among its major peers. Headline CPI held steady at 3.8% year-on-year, unchanged from July, while core CPI eased slightly to 3.6% from 3.8%. Sterling softened on the release as markets weighed the prospect of further Bank of England cuts later this year.

The key measure of services inflation, closely tracked by the BoE as a sign of domestic price pressures, fell to 4.7% from 5.0%, pointing to some cooling. While the data leans dovish, inflation remains more than double the Bank’s 2% target, leaving policymakers to balance softening wage growth against persistent household price pressures.

This mix of high inflation and slowing growth points to a sterling-unfriendly policy backdrop, with further fiscal tightening likely in November’s Budget. However, some major banks - including HSBC - argue the BoE may now pause its cutting cycle. If so, the pound could find support from the UK’s relatively high bond yields, which continue to attract foreign capital inflows.