US June inflation cools to 3.5%, boosting GBP/USD above 1.34

US consumer prices rose 3.5% in June from a year earlier, below the 3.8% consensus estimate and down from 4.2% in May, sending the dollar lower and pushing GBP/USD above $1.34.

"The downside surprise in CPI reduces the case for further Fed tightening, which is weighing on the dollar broadly," said Tony Sycamore, market analyst at IG in Sydney.

The June reading marked the lowest annual inflation rate since February and undershot every major bank forecast tracked by Bloomberg. Core CPI, which strips out food and energy, also moderated. The data comes as renewed conflict between US and Iranian forces complicates the inflation outlook, with Brent crude rising 3.3% to $78.49 a barrel after Tehran said it had again closed the Strait of Hormuz.

The softer inflation print shifts the policy calculus for the Federal Reserve. Fed funds futures now imply a 52.1% probability of two or more rate hikes by December, down from elevated expectations before the release. The next test comes with Fed Chair Kevin Warsh's testimony before Congress this week, followed by June PPI data Wednesday.

Sterling Gains as Rate Differential Shifts

The pound rose to $1.3405, up 0.3% on the session, while the euro gained 0.2% to $1.1415 against the dollar. The dollar index, which tracks the greenback against six major currencies, held near 101.07 after falling from earlier highs.

Sterling also strengthened against the euro, with GBP/EUR trading at 1.1744, close to its strongest level of the year. The move reflects both dollar weakness and relative resilience in the UK economy. Pantheon Macroeconomics said last week that UK economic data continues to paint an encouraging picture, with stronger car registrations, firmer house prices, and improving labor-market indicators.

The Bank of England faces its own policy challenge. While UK inflation has moderated, Pantheon noted that the rebound in oil prices following the Middle East escalation is "a reminder that the inflation outlook remains highly sensitive to geopolitical developments." Markets are pricing a greater chance that the MPC delivers one more 25-basis-point rate increase this year.

What Comes Next for the Dollar and Sterling

The US inflation data provides the Fed with cover to hold rates steady at its September meeting, but the trajectory remains uncertain. If energy prices continue to rise on Middle East disruptions, the disinflation trend could stall. Conversely, if the labor market softens further, rate-cut expectations could re-emerge.

For sterling, the near-term direction hinges on the relative policy paths of the Fed and the Bank of England, as well as the evolution of the Middle East situation. The UK economy's surprising resilience, as highlighted by Pantheon, provides a floor for the pound, but the oil price risk remains a wild card.

This article is for informational purposes only and does not constitute investment advice.