Sterling made gains on Wednesday as UK inflation data increased more than expected, whilst the Dollar weakened as traders anticipated potential Federal Reserve rate cuts as soon as September.

British headline inflation remained steady at 2% annually in June, surpassing forecasts of a 1.9% increase, while the closely watched services inflation reached 5.7%. However, core inflation met expectations.

The Pound edged up 0.1% following the data, yet at the time of writing it was flat at $1.2973.

Investors closely monitored Wednesday's inflation numbers for indications of whether the Bank of England might cut rates in August, Reuters reports.

“This morning's UK inflation figures will likely be of some concern to policymakers on the (Monetary Policy Committee), with continued signs of inflation remaining sticky within the UK economy,” stated Michael Brown, senior research strategist at Pepperstone.

“Naturally, the figures cast doubt on the MPC delivering the first 25bp cut of the cycle at the August meeting.”

In the broader market, the dollar showed mixed results against its peers, and it was unable to maintain gains from Tuesday's US retail sales data, which indicated consumer resilience and supported economic growth prospects for Q2.

Against the Dollar, the Euro strengthened to $1.0900, while the Australian Dollar remained stable at $0.6732. The Dollar index was flat at the time of writing at 104.21.

“Ultimately, the story that I think best describes it is that the markets have chosen the story of a Goldilocks economy,” stated Kyle Rodda, senior financial market analyst at Capital.com.

“Yes, retail sales are solid, at least on a nominal basis, and consumer demand is strong. But the more important data is the inflation data, and that's telling the market that the Fed is in a position to cut fairly soon.”

Investors have fully priced in a rate cut from the Federal Reserve in September and are anticipating over 60 basis points of easing by the end of the year.