GBP/USD rises as UK core inflation picks up, cenbanks ahead

The GBP/USD currency pair edged higher on Wednesday, after data showed annual core inflation in the UK picked up in August and ahead of the outcome of the Federal Reserve’s and the Bank of England’s policy meetings.

Annual inflation rate in the UK remained steady at 2.2% in August, data by the Office for National Statistics showed, in line with market consensus.

The biggest upward pressure came from air fares, which rose 11.9% YoY, and cost of recreation and culture, up 4% YoY.

Also, services inflation, which is closely monitored by the Bank of England, picked up to 5.6% in August from 5.2% in July.

The BoE had projected annual inflation rate of 2.4% in August before an acceleration to around 2.75% by year-end.

UK’s annual core CPI inflation, which excludes volatile categories such as food and energy, accelerated to 3.6% in August, the highest rate since April, from 3.3% in July.

“This morning’s numbers all but confirm that the Bank of England should keep rates on hold tomorrow,” ING analyst Francesco Pesole wrote in an investor note.

The Bank of England is expected to keep its benchmark interest rate without change at 5% at its September policy meeting.

The BoE cut its bank rate by 25 basis points to 5% in August, but said it would move cautiously in easing monetary policy further until the Monetary Policy Council was more certain that inflation would remain subdued.

August’s decision was “finely balanced”, as four MPC members opted to keep borrowing costs on hold.

Meanwhile, the US Dollar was weaker against major peers, as investors weighed the chances of an out-sized Federal Reserve rate cut later today.

Markets are now pricing in about a 65% chance of a 50 basis point interest rate cut at the Fed’s September 17th-18th policy meeting, compared to a 67% chance a day earlier.

According to Commonwealth Bank of Australia analyst Kristina Clifton, in case of a more aggressive policy easing, the US Dollar’s reaction could be drastically different.

“A 50 bps cut that scares markets about U.S. economic prospects could increase the USD because it is a safe haven currency,” Clifton was quoted as saying by Reuters.

“However, a 50 bps cut that eases concerns about U.S. economic prospects could undermine the USD.”

The case for a super-sized rate cut was somewhat weakened after an unexpected increase in US retail sales in August, which implied the economy remained on solid ground.

As of 8:17 GMT on Wednesday the GBP/USD currency pair was edging up 0.29% to trade at 1.3198.