Pound rises against dollar; UK inflation slows more than expected

LONDON (Reuters) -Sterling edged up against the dollar on Wednesday, as heightened uncertainty over the outlook for U.S. trade policy kept the U.S. currency under pressure across the board, while a batch of softer UK inflation data dented the pound against the euro.

British inflation slowed to an annual rate of 2.6% in March from 2.8% in February below analysts expectations of 2.7%, according to the office for National Statistics. This was below forecasts for a reading of 2.7% and the slowest pace in three months.

A measure of services inflation, something the Bank of England is monitoring closely, also eased to an annual rate of 4.7% in March, from February's 5% reading, below forecasts for 4.8%.

The pound was last up 0.3% on the day at $1.3267, close it its highest in six months against the dollar.

It was softer on the euro, which was up 0.5% on the pound at 85.66 pence.

Price pressures will likely rise in the months ahead, as the impact from U.S. President Donald Trump's tariffs filters through to consumers.

Economists at Deutsche Bank believe this effect will not be enough to push the rate of inflation above the BoE's current forecast for a peak at 3.7% in the third quarter this year -

and therefore, should give the Monetary Policy Committee (MPC) room to cut interest rates as the economy slows.

"Inflation will take a big step up in April, pushing above 3.25% year on year, as energy and water bills lead inflation higher. The good news? We still see inflation running below the MPC’s forecast through Q2-25 – giving the MPC enough runway to cut rates through the year," Deutsche Bank chief UK economist Sanjay Raya said.

Markets show traders expect the BoE to deliver three quarter-point cuts this year, leaving rates at 3.60% by December, their lowest since January 2023.

Trump's tariff policies have sown confusion among investors this month and sparked concern that the hit to global growth will be enough to trigger a recession. The dollar has been a major casualty of the demand from investors for non-U.S. assets, falling by more than 4% against a basket of currencies since April 2, when Trump initially unveiled his proposed suite of tariffs.

(Reporting by Alun John and Amanda Cooper; Editing by Toby Chopra)