The British pound strengthened against the U.S. dollar on Wednesday after UK inflation numbers reinforced expectations of additional interest rate increases by the Bank of England.
Consumer price inflation in Britain slowed slightly to 6.8% in July. However, core inflation, which excludes volatile food and energy costs, held steady at 6.9%, exceeding forecasts. Services prices also rose more than anticipated.
Sterling gained 0.3% versus the dollar to $1.2736, set for its largest single-day advance in a week-and-a-half. Against the euro, it climbed 0.1% to trade at 85.75 pence.
The stubbornly high core inflation reinforced headaches for the BoE, as it remains well above the 2% target. Money markets are now fully pricing in a 25 basis point rate hike next month, with a 10% chance of a bigger 50 basis point move.
Analysts expect the BoE will need to tighten more aggressively than other central banks to rein in wage-driven inflation pressures in Britain's tight labor market. The data bolstered views that interest rates will continue rising substantially over the coming months.
