The US Consumer Price Index (CPI) for June recorded a 0.4% monthly decline, marking the largest drop since April 2020 and bringing the annual inflation rate down to 3.5% from May's 4.2% [1]. The core CPI was flat against a 0.2% consensus and eased to 2.6% year-over-year [1]. The primary driver behind the softer inflation print was a 9.7% drop in gasoline prices, attributed to a ceasefire last month that reduced crude oil prices by roughly 25% [1].
Following the release of the inflation data at 12:30 GMT, the British Pound Sterling (GBP/USD, 'Cable') spiked to just below 1.3450 but quickly reversed gains, trading beneath the 1.3400 handle and remaining capped by the 200-day Exponential Moving Average (EMA) [1]. The initial rally was short-lived, as geopolitical tensions resurfaced: Washington and Tehran resumed hostilities, the Strait of Hormuz faced a renewed blockade, and crude oil prices rebounded by approximately 10% in July [1].
Market expectations for US monetary policy shifted in response to the data and subsequent Federal Reserve commentary. Fed Chair reiterated in two testimony slots that one positive inflation report is insufficient and reaffirmed the 2% inflation target, while a Fed Governor signaled willingness to hike rates if core inflation rises [1]. Rate futures reflected these signals: the probability of holding rates steady at this month's meeting rose to 86%, but markets still price in about a 70% chance of at least one hike by year-end, with no expectation of a cut [1]. This dynamic helped the US Dollar recover from its lows and pressured the Pound Sterling lower through the New York afternoon [1].
On the UK side, the Bank of England has kept its Bank Rate at 3.75% since December, with a 7-2 split in June as two members called for an immediate hike to 4.00% [1]. The Governor has ruled out rate cuts while a 13% energy price cap increase feeds into household bills, and the Bank projects inflation, currently at 2.8%, to rise above 3.5% by year-end [1]. Political uncertainty also lingers, as the Governor used the Mansion House address to urge the incoming Burnham government to focus on growth and fiscal discipline, highlighting ongoing risks for Sterling [1].
CONCLUSION
The US posted its softest inflation print in six years, briefly boosting the Pound Sterling before geopolitical tensions and oil price rebounds erased gains. Market participants now expect the Federal Reserve to hold rates steady in the near term but remain open to further hikes by year-end, while the Bank of England faces its own inflation and political challenges. Overall, the market reaction underscores persistent uncertainty and volatility for both currencies.