Pound Surges Amid Strong UK Services Inflation Data

The British pound hit its highest levels against the euro in nearly two years and against the dollar in around one year, following stronger-than-expected UK services inflation data for June. This led markets to reduce expectations for an August rate cut by the Bank of England. Higher hotel prices and the influence of Taylor Swift's tour were contributing factors.

The British pound surged to its highest levels against the euro in nearly two years and against the dollar in around one year on Wednesday, following stronger-than-expected UK services inflation data for June. This development led markets to adjust expectations for an August interest rate cut by the Bank of England.

The euro fell 0.1% to 83.92 pence, its lowest since August 2022, while the pound gained 0.13% against the dollar to reach $1.299. Official data showed British inflation holding steady at 2.0% year-on-year, above analysts' forecast of 1.9%, with services inflation registering at 5.7% compared to the anticipated 5.6%.

Increased hotel prices were partly responsible for the unexpected inflation reading, highlighting the Bank of England's concerns over price pressures in the services sector. According to Sanjay Raja, chief UK economist at Deutsche Bank, this marked the third consecutive month where services CPI exceeded expectations, raising the bar for an August rate cut.

Raja also pointed out the potential influence of higher live music and accommodation prices, possibly linked to Taylor Swift's current tour in Britain. Despite this, after the release of the data, rate futures indicated that investors saw a roughly one in three chance of a BoE rate cut on August 1, down from almost 50-50 prior to the inflation data.

(With inputs from agencies.)