UK CPI Rises to 3.1% as Markets Assess BoE Outlook Ahead of Fed Decision

UK inflation rose to 3.1% in August from 2.9% in July, adding to the factors the Bank of England (BoE) will consider ahead of Thursday’s policy decision. Core inflation held at 2.6%, while services inflation remained at 3.4%, with the increase concentrated in the headline measure rather than core or services inflation. Sterling may remain sensitive to how investors interpret the data alongside Tuesday’s softer labour-market figures.

Attention now turns to the Federal Reserve (Fed), with markets pricing a high probability of a 0.25 percentage-point increase in US interest rates later today. The US 10-year Treasury yield has eased back below 5% after briefly moving above that level on Tuesday, while the US dollar remains close to recent highs. With a 0.25 percentage-point increase largely priced in, market attention may focus more closely on the Fed’s updated projections and guidance for the remainder of the year.

Energy prices are also keeping inflation risks in focus. Brent crude remains above $107 a barrel after disruption to Saudi oil infrastructure raised concerns about potential supply disruption, which may add uncertainty to the UK, US and Eurozone inflation outlooks ahead of this week’s central-bank decisions.

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GBP: Sterling Trades Near Recent Lows as BoE Decision Nears

GBP/USD: 1.3481 | EUR/GBP: 0.8569

Sterling remains near recent lows against the US dollar after UK headline inflation rose to 3.1% in August from 2.9% in July. The increase was in line with market expectations but above the BoE’s previous projection of 2.8%, keeping expectations around the possibility of further policy tightening later this year in focus. Core inflation held at 2.6%, while services inflation remained unchanged at 3.4%.

Tuesday’s labour-market data showed slower wage growth and weaker hiring indicators. Regular wage growth slowed to 3.5%, vacancies fell to 702,000, and payroll employment declined by 26,000 in August, providing less evidence of renewed wage pressure even as higher energy costs lift headline inflation.

Market pricing still favours the BoE leaving Bank Rate unchanged at 3.75% on Thursday, although roughly a one-in-three probability of a rate increase is currently reflected in markets. The vote split and accompanying guidance could therefore influence market expectations for the path of Bank Rate later this year.

GBP/USD remains below 1.3500 with the US dollar trading near recent highs ahead of today’s Fed decision. EUR/GBP is holding around 0.8565, with sterling showing a smaller recent move against the euro than against the US dollar.

The immediate sterling focus now shifts to Thursday’s BoE decision, particularly how policymakers assess higher headline inflation alongside weaker wage and employment indicators.

Key technical reference levels for GBP/USD: Resistance sits near 1.3520, followed by 1.3540, while Support sits around 1.3470, followed by 1.3410.

Key technical reference levels for EUR/GBP: Resistance sits near 0.8572, followed by 0.8575, while Support sits around 0.8554, followed by 0.8530.

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EUR: Euro Trades Near Recent Lows as Sentiment Data Weakens

EUR/USD: 1.1557

EUR/USD is trading near 1.1550, remaining close to its recent one-month lows as softer Eurozone sentiment and a firm US dollar have coincided with pressure on the pair.

Germany’s ZEW Economic Sentiment Index rose only slightly to 34.7 in September from 34.2, falling short of expectations around 40. At the same time, the assessment of current conditions improved to -47.1 from -61.1, indicating some improvement in the present economic backdrop despite more cautious expectations for the months ahead.

The wider Eurozone reading was weaker. Economic sentiment fell to 25.8 from 31.4, compared with expectations for an increase to around 39.9. Inflation expectations also increased sharply, indicating increased concern among respondents over higher energy costs and their potential impact on prices.

Those energy pressures remain relevant for European Central Bank (ECB) policy. Higher oil and natural-gas prices may increase near-term inflation pressures. ECB policymakers have continued to leave open the possibility of further tightening if inflation risks persist even as the growth outlook remains uncertain.

For EUR/USD, attention now turns to today’s Fed decision. With a US rate increase widely expected, the pair could be sensitive to the Fed’s projections and guidance on whether additional tightening could follow later this year.

Key technical reference levels for EUR/USD: Resistance sits near 1.1555, followed by 1.1600, while Support sits around 1.1530, followed by 1.1500.

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USD: Dollar Trades Near Recent Highs as Fed Guidance Takes Centre Stage

DXY: around 99.70

DXY is trading around 99.70, close to a two-week high after extending its advance for a sixth consecutive session. The US dollar has traded near recent highs ahead of today’s Fed decision, with markets pricing roughly a 92% to 93% probability of an interest-rate increase.

If the Fed raises its target range by 0.25 percentage points, the target range would move to 3.75% to 4.00%, marking the first increase since 2023. With that outcome largely reflected in market pricing, greater attention is likely to fall on the updated economic projections, dot plot and Chair Kevin Warsh’s comments after the decision.

Those projections could influence expectations for the October and December meetings. A more restrictive-than-expected policy signal could, all else equal, be supportive of the US dollar, while less restrictive guidance could reduce market expectations for additional tightening. Currency movements will also depend on positioning, economic projections and the accompanying statement.

US Retail Sales are also due before the Fed announcement and will provide another reading on consumer demand. However, the policy guidance later today may remain the more significant influence on expectations for the US interest-rate path and the near-term direction of DXY.

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Other Currencies: Recent Dollar Gains Remain Visible Across Major Pairs

AUD/USD: 0.7133 | NZD/USD: 0.5757 | USD/JPY: 154.90 | GBP/JPY: 208.83

The US dollar’s recent gains remain visible beyond GBP/USD and EUR/USD. NZD/USD has fallen towards 0.5757, close to a two-month low, while AUD/USD is holding around 0.7133 following a period of higher US yields and increased concern about energy-related inflation pressures.

USD/JPY is trading near 154.90 after the yen touched a one-week low above 155 overnight. Japan’s August imports rose 28% year on year, the fastest increase in nearly four years, as higher oil prices lifted energy costs. Exports also increased 19.3%, while the trade balance remained in deficit.

The data adds to the inflation indicators policymakers may consider ahead of Friday’s Bank of Japan (BoJ) decision. Markets are pricing a high probability of a rate increase, and the yen could therefore remain sensitive to how the BoJ addresses higher import costs and the outlook for further tightening.

GBP/JPY is holding around 208.83, with sterling showing a stronger recent relative performance against the yen than against the US dollar while differences in central-bank expectations remain one of several factors affecting the major crosses.

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Current Rate Table

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Market Lookahead

Wed, Sep 16

• US Retail Sales (Aug)
• Fed Interest Rate Decision, Economic Projections and Press Conference

Thu, Sep 17

• BoE Interest Rate Decision
• US Initial Jobless Claims

Fri, Sep 18

• BoJ Interest Rate Decision and Press Conference
• UK Retail Sales (Aug)

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