By Stefano Rebaudo
(Reuters) - Sterling rose after UK data showed that underlying price pressures remained strong, meaning the Bank of England is likely to wait longer before cutting interest rates.
British inflation returned to its 2% target in May for the first time in nearly three years, while the closely-watched services prices rose by 5.7%.
Markets priced in a 30% chance of a BoE first cut by August from around 50% before the data, while expecting 44 bps of monetary easing in 2024 from almost 50 bps before the data.
The euro fell 0.20% to 84.32 pence against the pound, which was up 0.16% at $1.2730. It was flat right before the release of inflation data.
"For now, we are sticking with our forecast that the bank will first cut interest rates from 5.25% in August, although that relies on better news on services CPI inflation and wage growth in the coming months," said Ruth Gregory, deputy chief economist at Capital Economics.
Data last week showed British wages picked up more quickly than forecast.
"The big question is whether the bank sticks to previous guidance and primes the market for an August kick-off to a rate-cutting cycle," said Jamie Dutta, market analyst at Vantage, after forecasting no decision on rates by the BoE on Thursday.
"Keeping policy restrictive for 'an extended period' is the key phrase to watch."
"Of course, before we get to that point, there is the general election on July 4, which may preclude any significant changes to forward guidance at this meeting," he added. Analysts expected the BoE to start easing its monetary policy in August, according to all but two of 65 economists polled by Reuters last week. Most of them forecast at least one more reduction this year despite persistently high pay and services inflation.