FX.co ★ British Pound Strengthens to 3-Year High

The British pound surged towards the $1.35 mark, reaching its highest point since February 2022, as traders adjusted their expectations for future Bank of England rate reductions. This shift was prompted by inflation figures that exceeded forecasts. Annual inflation climbed to 3.5%, the peak since January 2024, surpassing both the anticipated 3.3% and the BoE's prediction of 3.4%. This rate remains significantly above the 2% target, primarily due to increasing energy, gas, and regulated prices. Importantly, services inflation—an indicator closely scrutinized by the BoE—rose to 5.4% from 4.7%, indicating ongoing underlying pressures. Consequently, market participants now anticipate just one additional 25 basis point cut by the end of the year, with the likelihood of a rate reduction in August decreasing from 60% to 40%. Earlier in May, the BoE implemented a 25 basis point reduction; however, the decision was contentious, as two members advocated for a steeper cut to 4%, while two others preferred to maintain the current rate.