Pound Sterling edged lower against the Euro and US Dollar n Wednesday after UK inflation slowed more than expected in June, strengthening the case for the Bank of England to keep interest rates unchanged despite lingering concerns over services prices.
The Pound-to-Dollar exchange rate (GBP/USD) traded at around 1.3376, down from Monday’s close above 1.3430 and further below July’s high of 1.3558.
The Pound-to-Euro exchange rate (GBP/EUR) stood near 1.1720, having retreated from a 2026 high of 1.1827 reached earlier this month.
UK consumer price inflation slowed to 2.6% year-on-year in June from 2.8% in May, undershooting the consensus forecast of 2.7%.
Core inflation held at 2.6%, in line with expectations, while services inflation eased only slightly to 3.6%, one-tenth above consensus.
Pantheon Macroeconomics said the underlying details were more dovish than the headline services reading suggested because an unusually sharp rise in airfares distorted the monthly figures.
“Underlying news was dovish as airfares drove stronger-than-expected core inflation.”
Airfares jumped 10% during the month, with Pantheon attributing the rise partly to the relatively late date on which prices were collected.
“The airfares news will unwind.”
Excluding volatile and government-set components, underlying services inflation fell to 3.6% from 3.8%. On a three-month annualised basis, the measure slowed more sharply to 2.5% from 3.6%.
“The MPC will focus on the dovish news from underlying pressures and continue signalling rates on hold.”
The accompanying inflation breakdown shows headline CPI at 2.6%, half a percentage point below the Bank of England’s June forecast, with the largest undershoots coming from food and household energy.
Food inflation slowed to 1.7%, its lowest rate since August 2024 and less than half the 3.6% rate previously anticipated by the Bank of England.
Pantheon cautioned that some rebound remains possible because food inflation has now fallen below the signals offered by the British Retail Consortium’s shop-price index, Eurozone food inflation and producer prices.
The long-run comparison between the UN world food price index and the food component of UK CPI suggests external food-price pressures may begin to rebuild, although the pass-through to consumers has so far remained limited.
Lloyds also emphasised the scale of the undershoot relative to the Bank’s projections.
“This morning the ONS has reported that CPI inflation in the UK in June was 2.6% y/y. That was 0.1ppts below the consensus estimate but is a full 0.5ppts below the BoE staff forecast.”
The bank said subdued food inflation was particularly important because policymakers have previously highlighted food and petrol prices as major influences on household inflation expectations.
Lloyds nevertheless identified three reasons for caution: energy prices are rising again, government policy could add stimulus, and services inflation remains comparatively sticky.
“Overall this outturn, alongside other recent data, should be sufficient for Bailey to continue his existing message on rates to want to look through the energy shock.”
ING also judged the underlying trend to be moving in the right direction despite the firmer-than-expected services figure.
“The trend looks good, and together with low private-sector wage growth, suggests domestically-generated inflation is benign right now.”
Pound Sterling Forecast: Softer Inflation Supports BoE Hold, But Sterling Momentum Fades
Pantheon expects headline inflation to rise again later this year, peaking at around 3.3% in November, as temporary tax effects reverse and some food and goods-price pressures return.
For now, however, the June data reinforce expectations that the Bank of England will leave rates on hold rather than respond to the renewed energy shock.
Pound Sterling’s reaction was modestly negative.
The Pound remains around 1% higher against both the Euro and Dollar during July, but the latest performance chart shows momentum has faded sharply since GBP/USD and GBP/EUR peaked in the middle of the month.
Pound Sterling’s July gains remain intact, although both GBP/USD and GBP/EUR have surrendered a sizeable portion of their mid-month advances as expectations for tighter Bank of England policy have eased.
