Stronger U.K. CPI Report Provides Temporary Relief for Sterling, Says Mitsubishi UFG

06:59 AM EDT, 07/16/2025 (MT Newswires) -- Sterling was lifted early Wednesday by the release of the stronger-than-expected United Kingdom consumer price index report for June, said Mitsubishi UFG.

It has helped to lift cable back above the 1.3400 level at the start of the European trading session after it fell to a low on Tuesday of 1.3379, wrote the bank in a note to clients. Similarly, EUR/GBP has fallen back to a low of 0.8663 after moving to within touching distance Tuesday of the 0.8700 level.

Wednesday's U.K. CPI report revealed that headline inflation unexpectedly picked up to 3.6% year-over-year in June from 3.4% in May. Core inflation picked up by a similar amount by 0.2ppt to 3.7%. It was the third consecutive monthly upside surprise for headline inflation. While service sector inflation held steady at 4.7% in June, it was expected to slow to 4.5%.

ING highlighted that the biggest contribution came from housing, utilities and other fuels, which added 0.95 ppt to the annual headline rate. Transport contributed 0.25ppt as well. The Bank of England expects CPI inflation to "remain just under 3.5% for the remainder of the year, with a brief increase to 3.7% in September.

The report will dampen expectations for the BoE to speed up the pace of rate cuts in the H2 of this year, although it is unlikely to prevent the BoE from sticking to the current quarterly pace of cuts by delivering another 25bps cut in August, added the bank. There are still 22bps of cuts priced in for the August Monetary Policy Committee meeting and 43bps in total by the November MPC meeting.

Market participants will be wary of pricing in a more hawkish outlook for BoE policy so close to the release on Thursday of the latest U.K. labor market report, according to MUFG. BoE officials, including Governor Andrew Bailey in a recent interview with The Times, have indicated more unease over weakening labor market conditions, which are viewed as the main potential trigger for a faster pace of rate cuts.

The bank still predicts sterling to underperform against the euro (EUR).

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.