Pound Sterling Drops After Softer UK Inflation

The Pound Sterling (GBP) experienced a sharp decline against major currencies during Wednesday’s London session, following a softer-than-expected inflation report from the UK Office for National Statistics (ONS). The July Consumer Price Index (CPI) report has heightened expectations of upcoming interest rate cuts by the Bank of England (BoE).

The annual headline CPI rose by 2.2%, slightly below the 2.3% forecast, and followed two months of inflation hitting the BoE’s 2% target in May and June. On a monthly basis, the CPI dropped by 0.2%.

Core CPI, which excludes volatile items like food and energy, decelerated to 3.3%, compared to the 3.4% expected and June’s 3.5%. The decline was largely driven by a slowdown in service sector inflation, which fell to 5.2% from 5.7%. This sector has been a key factor in sustaining price pressures within the UK economy.

High wage growth has been a major driver of service sector inflation, but recent data shows a slowdown. Average earnings, excluding bonuses, grew by 5.4% in the three months ending in June, down from 5.7% in the previous quarter. This easing in wage growth is expected to provide some relief to BoE policymakers who have been concerned about persistent wage-driven inflation.

Earlier in the week, Catherine Mann, a member of the BoE’s Monetary Policy Committee, warned of ongoing inflationary pressures. She noted that prices for goods and services could rise again and that wage pressures might take years to fully subside.

The combination of softer inflation data and slowing wage growth has increased market expectations that the BoE may soon shift towards cutting interest rates, further weighing on the Pound Sterling.