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The British Pound goes into Thursday's Bank of England decision facing a headwind after UK inflation matched expectations in August, a dovish outcome for the Bank.
Pound sterling tells us that Wednesday's on-expectation inflation numbers are something of a dovish signal to the Bank of England, which delivers its interest rate decision Thursday.
The Pound has dipped in the wake of the inflation release: the Pound to Dollar exchange rate is at 1.3480, down from 1.3494.
The Pound to Euro exchange rate is at 1.1675, down from 1.1685, the level it traded in the minutes leading to the release: a small but clear market move.
CPI inflation rose to 3.1% year-on-year in August, says the ONS, matching the consensus and up from 2.9% in July.
Prices rose 0.5% month-on-month, as expected, after 0.3% in July.
Core inflation held at 2.6%, in line with expectations, with a monthly rise of 0.3%.
The Monetary Policy Committee is expected to keep Bank Rate at 3.75% on Thursday, a sixth consecutive hold.
The rise in the headline rate was expected and came mostly from energy and petrol prices.
However, there will be some discomfort amongst some members at the Bank of England as inflation is well above target and the institution risks appearing as if it is sitting on the sidelines and not acting.
Further energy-driven inflation is still coming. Looking ahead, inflationary pressures will remain elevated as Ofgem's energy price cap rises 4% to £1,723 a year on October 1, with gas bills up 8%.
"High international gas prices are continuing to drive energy costs in the UK," says Neil Kenward, Director General for Markets at Ofgem.
E.ON Next forecasts the January cap at £2,131, a rise of nearly 24%.
The Bank's job is to stop that external shock from becoming part of domestic wage and price setting, and hikes are only needed if that happens.
A 'hawkish' message from the Bank on Thursday therefore cannot be ruled out, which would bolster GBP on the day.
Core inflation unchanged at 2.6% shows no sign of that yet, which gives the Bank no new reason to move away from a hold.
The energy price outlook means hike risk will come back with every data release this winter, but for now the Pound goes into Thursday without the support that hike bets would have given it.
For Pound-Dollar, Monday's one-month low at 1.3464 is the next support, and a daily close below it opens the way to the 1.34 area.
For Pound-Euro, the September 3 low at 1.1617 is the support to watch if Thursday's guidance offers no hint of a hike.
