The dollar remained firm on Wednesday ahead of a much-anticipated rate decision by the Federal Reserve later in the day, while sterling slid on increased bets the Bank of England (BoE) will pause its historic run of interest rate hikes.
The U.S. dollar index , which measures the currency against a basket of rivals, stood firm at 105.10 with traders awaiting the Fed’s rate decision.
The pound was volatile, last down 0.26% to $1.2360 after touching its lowest in almost four months following data showing UK inflation slowed more than expected in August.
British annual consumer price inflation (CPI) unexpectedly fell to 6.7% in August, official data showed on Wednesday, a day before the BoE is expected to raise rates again.
Economists polled by Reuters had forecast CPI would rise to 7.0% from July’s 6.8%.
“A shock deceleration in UK inflation provides good news for the BoE heading into tomorrow’s rate decision,” said Nick Rees, FX Market Analyst at Monex Europe. But the latest round of inflation data likely comes too late to change many policy makers’ minds ahead of the BoE meeting, he added.
Money markets though have started to price in a nearly 50-50 chance the BoE will keep rates on hold on Thursday after 14 back-to-back increases stretching back to December 2021. On Tuesday, they were pricing only a 20% chance of a BoE pause.
The UK inflation data “is casting serious doubts about whether the BoE will hike rates tomorrow”, ING strategist Francesco Pesole said.