Sterling gained slightly on Wednesday as investor concerns about the escalating conflict in the Middle East weakened the Dollar.
Additionally, UK data revealed that consumer inflation remained largely unchanged in May, weakening the argument for immediate interest rate cuts.
According to the Office for National Statistics on Wednesday, consumer prices increased by 3.4% year-on-year in May, matching expectations and slightly down from April’s 3.5% rate.
The decrease in May was driven by a fall in airfares, which had surged in April, along with the correction of a tax data error, while food prices rose at their fastest pace in over a year, Reuters reports.
Following the data release, Sterling rose 0.26% to $1.3462, up from approximately $1.3443 beforehand.
The Pound dropped 1.09% against the Dollar on Tuesday, marking its biggest one-day fall since early April, as the conflict between Israel and Iran entered its fifth day.
Meanwhile, the US military deployed fighter jets to the region. The escalating tensions sparked renewed risk aversion among investors, driving capital into the US Dollar.
By Wednesday, the Pound had regained some of its losses as investors temporarily turned their attention to the prospects for UK monetary policy.
“Consumer price inflation hasn’t budged in the UK, coming in at 3.4% for May. This was expected, and although this is a slightly better scenario than another ramp-up in price increases, it’s unlikely to persuade more decision makers to vote for a rate cut tomorrow,” according to Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Moreover, one factor that might reassure Bank of England policymakers ahead of Thursday’s borrowing cost decision was a slowdown in service sector inflation.
Service price inflation, a key indicator for the BoE, dropped to 4.7% in May from 5.4% in April, aligning with the BoE’s forecast. This figure was slightly below the 4.8% predicted by a Reuters news agency poll.
Money markets indicate that traders do not anticipate the Bank of England will cut UK interest rates before September, with the chance of one additional quarter-point reduction by December.