Pound holds firm as soft UK inflation leaves rate-hike bets intact

By Shashwat Chauhan

July 22 (Reuters) - The pound held steady against the dollar on Wednesday as a softer-than-anticipated inflation reading did little to alter market expectations for interest rate hikes later this year, while oil prices jumped as geopolitical uncertainty persisted. 

Sterling was trading flat at $1.3373, after depreciating for the last four sessions. It weakened 0.2% against the euro, but remained on pace for around a 1% rise for the month. 

British inflation cooled by more than expected last month as a brief de-escalation in the Iran war reduced fuel prices, but the slowdown is likely to offer only temporary relief to new Prime Minister Andy Burnham as he seeks to ease living costs.

"It has broadly met market expectations. Yes, inflation is tracking a little lower than what the Bank of England was projecting but most people had expected that and there's very little to be priced into sterling in response to today's data," said Nick Rees, head of macro research at Monex Europe. 

Interest rate expectations were largely unchanged. Money markets show investors believe the central bank will likely keep its lending rate steady when it meets next week. Traders are fully pricing in one quarter-point rate hike by December and a roughly 56% chance of a second such increase.. 

John Healey, Britain's new finance minister, welcomed Wednesday's data, but said the government needed to do more to help households. Burnham's government earlier this week had announced a cut in tax on energy bills and a lower cap for bus fares.

Meanwhile, crude oil prices jumped more than 4% to near six-week highs on mounting concerns about disruptions to key Middle Eastern supply routes because of escalating hostilities between the U.S. and Iran and threats to shipping by the Iran-backed Houthi militia in Yemen.

The pound is one of the better-performing G10 currencies so far this year, despite the UK's status as a net energy importer. Sterling has lost 0.8% in value against the dollar so far in 2026, but is some way ahead of laggard currencies like the Japanese yen, which has lost 4%, or the Swedish crown, which is down 5%.

"GBP risk premium is moving higher and, in an environment where the geopolitical backdrop remains fragile, we think GBP/USD is vulnerable to a move towards $1.32," BofA Global Research analysts said in a note. 

(Reporting by Shashwat Chauhan in Bengaluru; Editing by Amanda Cooper and Mrigank Dhaniwala)