UK Inflation Surges, Reshaping BoE Rate Expectations: Will GBP/USD Break $1.35?
UK Inflation Uptick Clouds Bank of England Outlook, GBP/USD Eyes $1.35 Breakout
By Bob Mason | Updated: August 20, 2025, 12:29 GMT+00:00
UK inflation data now adds doubt to the Bank of England’s future plans. Inflation moved higher in July, a sign that the central bank’s careful view faces more challenges amid mixed signals. In currency markets, traders watch the British pound against the US dollar as it nears a key resistance at $1.35. ### UK Inflation Rises in July, Challenging Rate Cut Expectations
In July, inflation in the UK stepped up. The Consumer Prices Index climbed to 3.8% year-on-year from 3.6% in June. Core inflation, which leaves out energy, food, alcohol, and tobacco, moved to 3.8% from 3.6%. Monthly, prices went up 0.1% after a 0.3% rise in June.
The Office for National Statistics shows that when owner-occupier housing costs are added, the CPIH reached 4.2% over twelve months, a small rise from 4.1%. Airfares pushed transport costs up, which acted against lower costs for housing and household services.
Core CPIH year-on-year fell slightly to 4.2% from 4.3%, while price rises in services grew to 5.0% from 4.7%. These numbers show that inflation problems continue across different parts of the economy, making it hard for the BoE to balance price control with growth.
Economic Context: Mixed Signals from GDP and Labor Market
Recent data from GDP and the labor market show mixed results. The UK economy grew by 0.4% in June after a 0.1% drop in May. Second-quarter GDP grew 0.3%, a slower pace compared to 0.7% in the first quarter. This slow growth raises worries about a stagnant economy even with high inflation.
Data on wages show that average earnings, with bonuses, moved up by 4.6% year-on-year in June, down from 5% in May. This soft wage growth may lower consumer demand and stir inflation concerns.
James Smith, Research Director at the Resolution Foundation, said, "Overall, Q2 GDP was better than many feared. Growth has held up okay this year and Rachel Reeves will stress the UK’s good spot among the G7. But stagnation remains a big problem with the risk of a lower growth forecast looming over the Autumn Budget."
BoE’s Monetary Policy Outlook Clouded by Inflation and Growth Dynamics
Last week, the Bank of England cut its main interest rate by 25 basis points to 4%. The vote was 5-4 and showed deep differences over inflation risks and wage trends. The rise in July inflation lowers the chance of another cut in September, even if some experts see easing later in 2025. ING Economics doubts that the BoE will change plans because of better GDP figures. One expert noted, "This might boost those who favor fewer rate cuts now. But upcoming inflation and jobs data will matter more." Analysts point out that GDP in the second half of the year may show weaker growth since the labor market faces more strain, with payrolled jobs dropping in eight of nine recent months.
The dates and size of future rate cuts will depend on coming inflation and employment reports. For now, the July figures push policymakers to be cautious about fast cuts.
GBP/USD Reacts to Inflation Data, Eyes $1.35 Breakout
Currency traders responded quickly to the new inflation data. Before the figures, GBP/USD hit a high of $1.34927 before falling to $1.34616. After the report, the pair slipped to $1.34757, then quickly rose to $1.34980. As of midday on August 20, the value held steady at about $1.34907. This movement shows that traders now do not expect an immediate rate cut by the BoE.
Market eyes now turn to August’s flash private sector PMIs due on August 21. Since UK services account for more than 70% of GDP, a clear drop in the Services PMI might push a rate cut in November. Signals from input prices, output prices, and employment in the sector will be watched closely for hints that inflation is easing.
Lower prices and cuts in jobs in services could push the BoE toward a softer stance. This may put pressure on the British pound.
Outlook
The new inflation figures mark ongoing price challenges in the UK even as growth slows. With this uncertain path, market watchers will track new economic data to see what the BoE does next and how GBP/USD handles the next test near $1.35. For live updates on BoE plans, UK inflation, and currency forecast news, follow FXEmpire’s real-time analysis and coverage.
About the Author
Bob Mason has over 28 years of work in the financial world. He has worked with global rating agencies and multinational banks. He now focuses on currencies, commodities, alternative asset classes, and global equities with a focus on European and Asian markets.
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