According to data from the UK Office for National Statistics, the inflation rate in July was lower than expected, rising from 2% to 2.2%, but lower than the expected 2.3%. Profit taking in GBP/EUR and GBP/CHF seems to have driven the decline of the pound. At the same time, core inflation has fallen from 3.5% to 3.3%, with an expected rate of 3.4%.

This may not fully alleviate the Bank of England's concerns about sustained price pressures, and it may not be enough to prompt consecutive interest rate cuts in September, "said economists at Capital Economics

They added in a report to the client after the report was released, "But it does provide some support for our viewpoint that CPI inflation will return below the 2% target level next year, and interest rates will further decline at a faster rate than market expectations

The most noteworthy thing is that the closely monitored service sector inflation index fell from 5.7% to 5.2% in July, hitting a two-year low, which may be welcomed by the Bank of England.

Kaitou Macro believes that this opens the door for further interest rate cuts later this year and may explain why the pound has almost completely weakened after the report was released.

Service sector inflation is closely monitored by the Bank of England as it is seen as a leading indicator of overall inflation and the risk of it consistently exceeding target levels in the coming years.

The other indicator that policy makers are most closely monitoring is average profit growth, which is one of the reasons why the Bank of England did not cut interest rates until August.

However, data released on Tuesday showed that the profit growth in June slowed down to the slowest pace of January 2021, with the previously included annual growth rate dropping to 4.5% and the non included annual growth rate dropping to 5.4%.