UK inflation data remains steady, with the market betting that the central bank will stay put in August, leading to a reversal in the pound's decline

According to the latest inflation data from the UK, continuous price pressure has been revealed, leading traders to increasingly believe that the Bank of England will maintain interest rates next month. The market currently expects the likelihood of a 25 basis point rate cut in August to drop to about 30%, lower than the less than 50% on Tuesday.

Figure 1

According to the latest data released by the UK National Statistics Office, the Consumer Price Index (CPI) in June this year rose by 2.0% year-on-year, unchanged from May. This data is in line with the market's general expectation of 2.0% economic growth and exactly meets the inflation target set by the Bank of England. The UK's core CPI in June (excluding volatile food and energy items) rose by 3.5% year-on-year, consistent with the increase in May, meeting market expectations. In addition, the CPI inflation rate for the service industry in the UK remained at 5.7% year-on-year in June, showing the continued existence of price pressure in the service industry.

Although the Consumer Price Index rose by 2% year-on-year in June, unchanged from the previous month, the inflation rate in the service industry is still higher than the Bank of England's previous forecast. This indicator is closely watched by policymakers as it can provide clues to potential economic trends.

Zara Nokes, a global market analyst at Morgan Stanley Asset Management, pointed out, "Today's data should put an end to the rate cut in August." She believes that the current inflation data "may be stronger than the data needed for the central bank to start cutting rates."

This expectation has driven the pound higher, not only reversing its previous decline but also rising by 0.1% to $1.2989, close to its highest level in a year. Strategists at Goldman Sachs predicted last week that the pound would reach $1.30 in the short term.

Figure 2

It is widely believed that the Bank of England will cut interest rates fewer times this year than the Federal Reserve, which has kept the pound's performance in the currency market better than other currencies. Currently, the market expects the Bank of England to cut interest rates no more than twice this year, i.e., less than 50 basis points. In contrast, in the United States, the market is considering the possibility of the Federal Reserve implementing up to three rate cuts.

Officials at the Bank of England, including Chief Economist Huw Pill, are concerned about the persistent inflation pressure in the labor market and the service industry. They want to see more concrete evidence that price pressures are easing before considering easing monetary policy Pepperstone strategist Michael Brown said, "These data naturally raise doubts about whether the Monetary Policy Committee will cut interest rates by 25 basis points for the first time at the August meeting." He believes that this should boost the pound, "especially considering that the Federal Reserve is almost certain to start its own easing cycle after the summer recess, which could trigger transatlantic policy divergences."

Overall, the Bank of England's cautious approach to monetary policy and close attention to inflation are influencing market expectations and the pound's movements. As more economic data is released, the market will continuously adjust its forecasts for interest rate changes