Pound Sterling Climbs Despite Cooling UK Inflation Data

The Pound Sterling strengthened against both the Euro and US Dollar on Wednesday after softer-than-expected UK inflation data reduced immediate fears of aggressive Bank of England tightening, while investors also looked through what analysts described as temporary distortions in the figures.

The Pound to Euro exchange rate (GBP/EUR) traded at 1.15681, up 0.24% on the day, while the Pound to Dollar exchange rate (GBP/USD) climbed to 1.34569, up 0.47%.

Official data showed UK headline inflation slowing to 2.8% in April from 3.3% previously, below expectations for a 3.0% reading.

Core inflation also eased more than forecast, falling to 2.5% from 3.1%, while services inflation dropped sharply to 3.2% from 4.5%.

Pantheon Macroeconomics said the decline was heavily influenced by temporary and government-driven factors rather than a genuine easing in underlying inflation pressures.

“The Chancellor freezing a bunch of government-set prices and removing green levies from energy bills, combined with much smaller water bill hikes, cut inflation sharply,” Pantheon noted.

The consultancy added that much of the downside surprise stemmed from volatile sectors including airfares and package holidays.

“Air travel prices fell sharply year-over-year as this April was compared to an Easter-boosted month a year earlier,” Pantheon said, adding that the weakness “will be a temporary drag”.

Bank of England June Hike Expectations Fade

The softer inflation report, combined with weaker labour-market data earlier this week, significantly reduced expectations for a June Bank of England rate increase.

Pantheon said the latest figures “scotch a June hike”, although it still expects the MPC to raise rates in July as inflation pressures rebuild later in the year.

“We still look for the MPC to hike rates in July,” Pantheon said, forecasting inflation averaging 3.4% through the remainder of 2026 and peaking near 3.7% in September and November if current energy-price assumptions hold.

Lloyds Bank similarly argued that policymakers are unlikely to place too much weight on the April slowdown.

“The moderation in inflation isn’t a development to be dwelt upon,” Lloyds said, warning that higher fuel costs are still likely to push CPI back above 3% later this year.

Barclays also noted that weaker recreation and travel pricing played a major role in the downside surprise.

“The downward shift in overall inflation was driven by the downward step in the Ofgem energy price cap, and weak recreation spending,” Barclays said.

Pound Sterling Forecast: Markets Still Focused on Politics

Despite the softer inflation release, Sterling recovered ground during the European session as investors continued focusing heavily on UK political uncertainty and broader global risk sentiment.

Barclays noted that while GBP initially slipped after the inflation release, the move quickly reversed.

“The market continues to focus on the political uncertainty in the UK, rather than the underlying economic data,” the bank said.

ING said the latest inflation figures weaken the case for aggressive BoE tightening, although the bank still sees a June hike as possible.

“A June rate hike looks pretty much 50:50, but it narrowly remains our call given ING’s base case for energy prices,” ING said.

Pantheon also cautioned that underlying inflation pressures remain stronger than the headline data suggest.

“Survey measures suggest that underlying services inflation will accelerate sharply in the next three months,” the consultancy warned.

While softer inflation has reduced immediate pressure on the Bank of England to raise rates in June, economists continue warning that energy costs and underlying services inflation could push UK price growth sharply higher again later this year.