• Headline inflation increased from 2.6% to 2.9% year-on-year.
• Core inflation remained at 2.6%, above the 2.5% forecast.
• Services inflation held at 3.4%, instead of rising to 3.5%.
• Wage growth slowed, while unemployment benefit claims increased by 27,800.
• The Bank of England is expected to leave interest rates unchanged tomorrow.
• Energy pushes headline inflation higher

UK consumer price inflation accelerated from 2.6% to 2.9% year-on-year in August, in line with market expectations. Core inflation delivered a slightly stronger reading, remaining at 2.6% against expectations for a decline to 2.5%. The figures confirm that price pressures in the British economy remain relatively persistent.

The increase in headline inflation was driven mainly by energy prices, including more expensive fuel. This is particularly important given the continued rise in global oil prices. Following the Houthis’ advance in Yemen, crude oil is moving towards USD 110 per barrel, increasing the risk that UK inflation will remain above the Bank of England’s target for longer.

For the Bank of England, indicators of domestic price pressure are more important than the headline CPI figure alone. Core inflation remained at 2.6%, while services inflation was unchanged at 3.4%. The latter was slightly better than some forecasts, which had pointed to an increase to 3.5%.

Airfares also had a smaller impact than expected. Prices increased by 6.2% compared with July, but this was not enough to push services inflation higher.

The data therefore suggest that rising energy costs have not yet generated significant second-round effects. In other words, higher fuel and energy prices are not visibly spreading into wages and other service-sector categories.

The latest labour market figures provide a similarly mixed picture. Average weekly earnings increased by 3.9% year-on-year in July, in line with forecasts but below the previous month’s growth rate of 4.2%. Regular pay growth, excluding bonuses, remained at 3.5%.

The unemployment rate was unchanged at 4.9%, slightly better than the 5.0% expected by economists. However, the number of people claiming unemployment-related benefits increased by 27,800 in August, considerably more than the forecast rise of 8,300. Claims had declined by 11,800 in the previous month.

The UK economy is therefore sending conflicting signals. Better than expected July growth data indicate that economic activity remains resilient, but weaker wage growth and the sharp increase in benefit claims point to a fragile labour market.

The Bank of England must balance the risk of persistent inflation against the possibility of further weakness in employment and economic growth. More expensive energy supports maintaining a restrictive policy stance, but stable services inflation and slowing wage growth reduce the need for an immediate rate increase.

Today’s inflation report is unlikely to materially change expectations ahead of tomorrow’s decision. The Bank of England is widely expected to keep interest rates unchanged. The market will focus primarily on the voting split and the guidance concerning future meetings.

At the end of June, markets were pricing in slightly more than one rate hike by the middle of next year. They now expect around four increases. This substantial shift reflects higher energy prices and the more hawkish stance adopted by major central banks. The European Central Bank has delivered a more restrictive message, the Reserve Bank of Australia is moving towards another increase, and the Federal Reserve and the Bank of Japan may also tighten policy.

Four Bank of England rate hikes still appear to be an aggressive scenario. Today’s inflation figures do not provide a clear justification for starting a rapid tightening cycle. Headline inflation has moved closer to 3%, but services inflation has not accelerated and wage pressures are gradually easing.

The forthcoming debate over the UK budget creates an additional source of uncertainty. Any renewed fiscal tightening could weaken economic activity and reduce the Bank of England’s room to raise interest rates.

GBP/USD initially rose to around 1.3495 following the CPI release before retreating towards 1.3480. The limited reaction suggests that the data have not fundamentally altered the outlook for UK monetary policy. If the Bank of England fails to validate the market’s hawkish expectations, investors may reduce their bets on future rate hikes, creating downside risk for sterling.

Since July 2025, GBP/USD has been trading within a broad consolidation range between 1.37–1.38 and 1.30–1.3160. The US dollar has been strengthening again since 26 August this year, although the scale of the decline in the currency pair remains limited for now. The long-term trend remains upward, with no clear signs of a reversal at this stage.

Opinions are the authors'; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. The provided publication is for informational and educational purposes only.
If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please refer to the MarketPulse Terms of Use.
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• A September Fed rate hike is increasingly likely, with market-implied odds rising above 85% after stronger-than-expected core inflation data.
• Inflation risks remain elevated, driven by persistent price pressures, higher oil prices, strong economic growth and rising consumer inflation expectations.
• Further rate hikes may follow, while tighter monetary policy could also intensify political tensions between the Federal Reserve and Donald Trump.

The Federal Reserve is facing growing pressure to raise interest rates at its September 15–16 meeting. The latest U.S. inflation data came in above expectations, while the American economy remains strong enough to leave the Fed with increasingly fewer arguments for keeping rates at their current level.

Core CPI rose 0.3% month over month in August, exceeding economists’ forecasts. The data confirmed that despite more than five years of efforts to bring price growth under control, inflationary pressures in the United States remain elevated. Of particular concern to the Fed is the lack of sufficiently clear progress toward its 2% inflation target.

The market reaction was swift. The probability of a rate hike at the September meeting rose from around 70% to more than 85%. Investors also began assigning a greater probability to a second increase by December. Following the release of the data, economists at institutions including TD Bank and JPMorgan revised their forecasts, pointing to a higher likelihood of monetary policy tightening.

Brent crude increase rite hike probability

A record increase in wireless phone service prices accounted for a significant share of August’s rise in core inflation. This suggests that part of the acceleration may have been driven by a one-off factor. However, the Fed must also consider other sources of price pressure that could prove far more persistent.

One of them is rising oil prices. Brent crude climbed as high as $109 a barrel on Thursday. More expensive energy could gradually feed into transportation and production costs and, ultimately, into the prices of other goods and services. Strong demand in the economy, partly driven by the rapid expansion of data center infrastructure, is another factor sustaining inflationary pressure.

A rate hike has also become more likely because of earlier comments from Fed Chair Kevin Warsh. He has stressed that core inflation has not improved sufficiently and that the central bank will have to act unless convincing evidence emerges that inflation is moving sustainably back toward the 2% target. Against that backdrop, leaving rates unchanged could be seen as inconsistent with his earlier statements.

Some economists therefore believe that the September meeting is about more than just the level of interest rates. The credibility of the Fed chair may also be at stake. Bloomberg Economics says the market is now clearly expecting a rate hike and that failing to deliver one could weaken Warsh’s position.

Inflation and higher oil prices increase pressure on the Fed

Support for higher interest rates had been growing within the Federal Reserve even before the latest inflation figures were released. The central bank has left rates unchanged at five meetings this year, but in July three members voted in favor of a 25-basis-point increase. Two other Fed officials who did not have voting rights at the time expressed a similar view.

The strength of the U.S. economy also supports the case for tighter monetary policy. Unemployment remains low and stable, while some Fed officials are beginning to conclude that the current level of interest rates is restraining demand less than previously assumed.

If that assessment proves correct, the central bank could decide that at least some of the rate cuts implemented in 2025 need to be reversed. The Fed lowered rates by a total of 75 basis points that year. With economic growth remaining strong and inflation elevated, current borrowing costs may be too low to curb price pressures effectively.

Consumer surveys are also sending worrying signals. According to the University of Michigan, consumers’ one-year inflation expectations rose to 4.6% in September from 4.0% a month earlier. Moreover, for the first time since 2023, a majority of respondents expect interest rates to rise over the next year.

Rising inflation expectations are particularly important for the Fed. If households and businesses begin to assume that high inflation will persist for longer, those expectations could influence decisions on wages, prices and spending. That, in turn, would make returning inflation to the Fed’s target even more difficult.

Markets are pricing in further rate hikes

A growing number of economists believe that a potential September move may not be the final rate hike of the year. Markets have also started pricing in the possibility of another increase before year-end. The main argument is the strength of the economy, which could expand this quarter at a pace well above its long-term trend.

Such strong growth combined with low unemployment increases the risk that demand will remain too robust for inflation to return quickly to 2%. If oil prices also remain high, the Fed could find itself forced to tighten monetary policy more aggressively.

The conflict in Iran remains another significant source of uncertainty. Its impact on the oil market could add to inflationary pressures in the U.S. economy. If higher energy costs prove persistent and begin feeding through to other categories of prices, the case for further rate hikes will become even stronger.

The Fed’s decision could intensify its conflict with Donald Trump

Tighter monetary policy would have political as well as economic consequences. Donald Trump has been calling for lower interest rates, meaning that a rate hike would likely further increase tensions between the White House and the Federal Reserve.

The Fed therefore finds itself in an increasingly difficult position. On the one hand, it must respond to persistent inflation, rising inflation expectations, high oil prices and a strong economy. On the other, higher interest rates mean increased borrowing costs for households and businesses and could trigger another wave of political pressure on the central bank.

The latest data have nevertheless shifted the balance of arguments clearly toward tighter monetary policy. Until recently, the main question was whether the Fed would raise rates in September. Increasingly, the more important question is whether a September move would be a one-off adjustment or the beginning of a longer tightening cycle that reverses some—or even all—of the rate cuts implemented in 2025.

Opinions are the authors'; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. The provided publication is for informational and educational purposes only.
If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please refer to the MarketPulse Terms of Use.
Visit https://www.marketpulse.com/ to find out more about the beat of the global markets.
© 2026 OANDA Business Information & Services Inc.

• ECB hike largely priced in: Markets widely expect the ECB to raise its deposit rate by 25 basis points to 2.50%. The bigger catalyst for EUR/USD is whether Christine Lagarde signals further tightening.
• Energy inflation has shifted the ECB outlook: Brent crude above US$100 and Eurozone inflation above 3% have revived hawkish policy risks.
• ECB-Fed divergence is critical: A hawkish ECB combined with stable Fed expectations would favour EUR/USD, while indications that the ECB is near its terminal rate alongside rising Fed hike expectations would strengthen the US dollar.
• EUR/USD technical structure remains constructive: The pair has reclaimed its rising 20-day MA and is moving back above the 200-day MA at 1.1623.

EUR/USD is holding close to a two-week high around 1.1640 ahead of today’s European Central Bank (ECB) monetary policy decision, with markets widely expecting a 25-basis-point rate hike as policymakers respond to renewed inflation pressures from surging energy prices.

The expected move would lift the ECB’s deposit facility rate from 2.25% to 2.50%, marking its second rate hike this year after the central bank restarted tightening in June. The hike itself is largely priced in; therefore, the bigger directional catalyst for EUR/USD is likely to come from ECB President Christine Lagarde’s guidance on whether further tightening is required.

The renewed spike in energy prices has become the dominant macro driver behind the ECB’s hawkish shift. Brent crude has moved back above US$100 per barrel, following another escalation in the US-Iran conflict and disruptions to shipping in the Middle East. Eurozone inflation is running above 3%, leaving headline inflation well above the ECB’s 2% medium-term target.

This creates an uncomfortable policy mix for the ECB. Higher oil and gas prices are simultaneously lifting inflation while threatening economic growth, leaving policymakers to decide how aggressively they should respond to what remains largely a supply-driven inflation shock.

At its July meeting, the ECB kept the deposit rate unchanged at 2.25%, while stressing that the full inflationary impact of the energy shock had yet to materialise and that it would monitor indirect and second-round effects closely. That makes today’s communication particularly important: any evidence that higher energy costs are spreading into service prices, wages or inflation expectations would strengthen the case for additional hikes.

That is probably the most important question for EUR/USD.

A Reuters poll published last week showed economists broadly expecting today’s 25-basis-point hike to 2.50%, but with most forecasting that this would be the final increase in the current cycle. Eurozone growth is expected to remain relatively soft, while wage pressures have moderated, reducing the risk of another sustained wage-price spiral.

However, the balance of risks has shifted toward a more hawkish stance as the Middle East conflict has intensified.

Deutsche Bank, for example, now expects another 25-basis-point ECB hike in December, taking the potential terminal deposit rate to 2.75%, arguing that persistent energy-related inflation risks could require tighter monetary policy for longer.

This distinction matters for EUR/USD.

If Lagarde signals that 2.50% may be the peak, the euro could struggle to extend its recent gains, as today’s hike is already heavily discounted.

Conversely, language suggesting that the Governing Council remains prepared to hike again, particularly if energy inflation feeds into underlying prices, would encourage markets to price a higher ECB terminal rate, providing a potential positive catalyst for EUR/USD.

EUR/USD will also trade on the relative rate outlook between the ECB and Federal Reserve, rather than the ECB decision in isolation.

The Fed currently maintains its policy rate at 3.50%-3.75%. A Reuters poll shows around 70% of economists expect the Fed to remain on hold at its 15-16 September meeting, although market pricing has become significantly more hawkish after stronger US economic data and renewed inflation concerns.

The Fed funds futures market is now assigning roughly a 62% probability of a Fed rate hike this month, with higher energy prices also creating upside risks to US inflation (see Fig. 1).

This sets up an important relative-rates battle for EUR/USD:

A hawkish ECB and unchanged Fed expectations suggest a positive outlook for EUR/USD.

ECB signals tightening is nearly finished, and rising Fed hike expectations suggest EUR/USD is negative.

Further ECB rate hikes priced alongside Fed rate hikes imply that EUR/USD is likely to become more sensitive to economic growth and bond-yield differentials.

Hence, tomorrow’s US CPI release could be almost as important for EUR/USD as today’s ECB meeting, because stronger-than-expected US inflation would reinforce expectations for Fed tightening and potentially widen the US-eurozone yield differential back in favour of the US dollar.

Now, let’s focus on the short-term trajectory (1 to 3 days) of the EUR/USD from a technical analysis perspective.

The recent 1.23% minor corrective decline seen in the EUR/USD from the 21 August 2026 high of 1.1712 to the 2 September 2026 low of 1.1566 may have ended.

The price action has traded back above its rising 20-day moving average since Friday, 4 September 2026, ex-post the US non-farm payroll release, and is now inching back above the key 200-day moving average (1.1623) with the current intraday level at 1.1638 at this time of writing (see Fig. 2).

These observations suggest that EUR/USD may be undergoing a new minor bullish impulsive up-move sequence.

Watch the 1.1604 short-term pivotal support to maintain the minor bullish impulsive structure, and a clearance above the 1.1654 near-term resistance targets the next intermediate resistances at 1.1680 and 1.1710 in the first step.

On the other hand, a failure to hold and an hourly close below 1.1604 negate the bullish tone, paving the way for a choppy minor corrective decline that could expose the next intermediate supports at 1.1583 and 1.1560.

Opinions are the authors'; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. The provided publication is for informational and educational purposes only.
If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please refer to the MarketPulse Terms of Use.
Visit https://www.marketpulse.com/ to find out more about the beat of the global markets.
© 2026 OANDA Business Information & Services Inc.