Cooling Inflation Reduces Rate Hike Expectations, but Underlying Price Pressures May Limit Sterling's Downside

Summary:

UK inflation continued to ease in June, leading markets to largely rule out the possibility of further Bank of England (BoE) rate hikes in the near term. However, core inflation remains relatively resilient and service-sector price pressures have yet to fully dissipate, suggesting that the BoE is likely to maintain a cautious policy stance.

BUY GBPUSD

EXP

TRADING

1.33781

Entry Price

1.38000

1.32580

1.33718 -0.00024 -0.02%

0.0

Pips

Flat

1.32580

Exit Price

1.33781

Entry Price

1.38000

Fundamentals

The UK's Consumer Price Index (CPI) rose 2.6% year-on-year in June, down from 2.8% in May and below market expectations of 2.7%. On a monthly basis, CPI increased by 0.1%, slowing from the previous month's 0.2% gain. This indicates that overall inflation in the UK remains on a gradual disinflation path, with lower food, fuel, and energy prices being the primary drivers behind the moderation.

However, the underlying composition of the inflation data suggests that domestic price pressures have not completely disappeared. Core CPI, which excludes energy, food, alcohol, and tobacco, remained unchanged at 2.6%, above market expectations of 2.5%, highlighting the continued resilience of underlying inflation.

Meanwhile, the BoE's closely watched measure of domestic inflation pressure—services inflation—eased slightly from 3.7% to 3.6%. Although this extends the disinflation trend, the level remains relatively elevated, indicating that wage growth and domestic demand continue to support price pressures. Therefore, the recent decline in inflation appears to be driven more by easing external cost pressures rather than a fundamental weakening in domestic inflation dynamics.

Markets have now largely ruled out another BoE rate hike at the upcoming meeting, but this does not imply an imminent shift toward monetary easing. BoE Governor Andrew Bailey has previously emphasized that policymakers need greater confidence that inflation is sustainably returning to target before considering interest rate cuts.

Furthermore, inflation risks remain skewed to the upside in the coming months. As favorable base effects from energy prices fade, combined with potential increases in global oil prices and renewed supply-chain pressures, UK inflation could rebound toward around 3.3% this autumn. Should geopolitical tensions in the Middle East once again push energy prices higher, inflation could rise even more than currently anticipated.

Overall, the latest inflation data reinforce the BoE's "higher-for-longer" policy narrative. While the need for additional tightening has diminished, persistently elevated core and services inflation suggest that interest rates are likely to remain restrictive in the near term, continuing to provide fundamental support for the British pound.

Cooling Inflation Reduces Rate Hike Expectations, but Underlying Price Pressures May Limit Sterling's Downside_1

Technical Analysis

GBP/USD remains in a high-level consolidation phase in the short term, with the intraday bias remaining neutral to slightly bearish. As long as the pair remains below the 1.3557 resistance level, further range-bound trading is likely.

Nevertheless, the medium-term bullish outlook remains intact as long as the key support level at 1.3301 holds. A decisive break above 1.3557 would confirm the resumption of the broader uptrend, opening the door for a move toward 1.3658 and potentially the major resistance area around 1.3780.

Conversely, an unexpected break below 1.3301 could trigger additional profit-taking and technical selling pressure, exposing the pair to further downside toward 1.3139.

Overall, while easing UK inflation has reduced expectations for further BoE rate hikes, underlying price pressures remain resilient, making it likely that the central bank will maintain a restrictive policy stance for longer. Against a backdrop of limited upside momentum in the US dollar, GBP/USD could continue its medium-term upward trajectory as long as the 1.3300 area remains intact, gradually moving toward the 1.3800 handle.

Trading Recommendation

Direction: Buy

Entry Price: 1.3340

Target Price: 1.3800

Stop Loss: 1.3258

Valid Until: August 21, 2026, 23:55

Support Levels: 1.3322, 1.3302, 1.3219

Resistance Levels: 1.3451, 1.3559, 1.3658

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