UK Inflation Target Hit, Sterling Up (Short-Term?)

British pound strengthens against euro and dollar after inflation dips to Bank of England's target.

* UK inflation fell to 2.0% in May, meeting the BoE's target for the first time in nearly three years.
* This news sparked a modest rally in the pound, with GBP/EUR rising to €1.1860 and GBP/USD reaching $1.2727.
* However, services inflation remains high, prompting speculation that the BoE may hold off on interest rate cuts despite falling headline inflation.
* Market expectations for an August rate cut have softened to around 36%, down from 55% before the inflation data.
* The Bank of England is expected to maintain interest rates at its meeting on Thursday.

Future movement of GBP likely hinges on upcoming UK data:

* Wednesday's release of June CPI data could further weaken the pound if it confirms expectations of persistently high services inflation.
* The BoE's monetary policy decision on Thursday is also a key event, with limited forward guidance potentially disappointing GBP investors.

Euro subdued by lackluster German economic data:

* The euro showed little reaction to Germany's latest Zew economic sentiment index, which missed forecasts.

Overall, the outlook for GBP remains uncertain. While lower headline inflation provided a temporary boost, concerns about sticky services inflation and the BoE's monetary policy stance could weigh on the pound in the coming days.