UK Inflation Holds Bank of England September Rate Hike in Focus as US Dollar Strength and ECB Decision Drive Currency Markets

Key Highlight

• UK inflation delivered a mixed result. Headline CPI eased to 2.6 %, while core inflation also reached 2.6 % and services inflation rose to 3.6 %, both exceeding expectations. Sterling gained a modest 0.05 % against the US dollar following the release, with markets continuing to price in the possibility of a Bank of England rate increase in September.

• The US dollar remains the strongest conviction view, with a 72 % outlook for further strength against the euro. Ongoing tensions in the Middle East continue to support demand for safe haven assets, while President Trump played down the prospect of renewed negotiations, keeping geopolitical risks elevated.

• Attention now turns to tomorrow's European Central Bank meeting. While interest rates are expected to remain unchanged, any guidance on the likelihood of a September rate increase could drive significant movement in both GBP EUR and EUR USD.

Market Recap

Political developments in the UK added fresh uncertainty for sterling after the new Prime Minister Burnham  signalled greater flexibility on fiscal policy. Government borrowing costs climbed to their highest level since May, while the appointment of a new Chancellor increased expectations of higher defence spending.

Geopolitical tensions remained firmly in focus as the United States carried out a tenth consecutive night of strikes on Iran and another tanker was attacked in the Strait of Hormuz. This continued to strengthen the US dollar through safe haven demand, making international dollar purchases more expensive for UK businesses.

Markets are still pricing more than 40 basis points of Bank of England tightening by the end of the year, although upcoming wage data will determine whether investors maintain those expectations.

Elsewhere, the Australian dollar strengthened, with GBP AUD falling 0.36 percent. This increased the cost of purchasing AUD 250,000 by approximately £240, highlighting how even modest market moves can quickly affect international payment costs.

Market Overview

The latest UK inflation figures have done little to alter the broader outlook. Although lower fuel and food prices pulled headline inflation down to 2.6 percent, stronger than expected core and services inflation continue to support the case for the Bank of England to keep interest rates higher for longer. As a result, a September rate increase remains firmly on the table.

The US dollar continues to benefit from both geopolitical uncertainty and the interest rate advantage over Europe. While the euro saw only a limited reaction following the UK inflation release, markets remain focused on tomorrow's ECB announcement for the next major catalyst. Any indication that policymakers are preparing to tighten policy in September could provide support for the euro, but for now the dollar retains the stronger position.

Sterling presents a more balanced picture. Stronger underlying inflation offers support for the pound, but global risk sentiment continues to favour the US dollar. Against the euro, the outlook remains finely balanced in the short term, with the ECB decision likely to determine the next direction. Over the medium term, sterling still retains a modest advantage provided the Bank of England maintains a wider interest rate gap over the eurozone.

For businesses making international payments, the current environment remains highly event driven. Central bank guidance, inflation data and geopolitical developments continue to influence exchange rates, making it increasingly important to monitor market events when planning currency transfers.

22nd July 2026

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