Pound (GBPUSD=X)

The pound fell against the dollar in early European trading on Wednesday, declining 0.2% to $1.2682, as investors digested the latest UK inflation data and looked ahead to interest rate decisions.

Data from the Office for National Statistics (ONS), released on Wednesday, showed that inflation rose to 2.6% in November, up from 2.3% the previous month.

The increase was in line with expectations, though it is further from the Bank of England's (BoE) 2% target, cementing expectations that the central bank will keep interest rates on hold at its last meeting of the year on Thursday.

Susannah Streeter, head of money and markets at Hargreaves Lansdown (HL.L), said: "Wariness is creeping into the central bank playground given that inflation is back on the see-saw, continuing to rise, after dipping below target in September.

Read more: FTSE 100 LIVE: Markets higher as UK inflation bump points to Bank of England interest rate hold

"Even though the UK economy is also on the slide, with a back-to-back contraction in October and November, policymakers aren’t likely to cut rates tomorrow."

The US Federal Reserve is due to share its latest interest rate decision later on Wednesday, with markets widely expecting it to announce another cut.

"With inflation not bounding up in quite such big steps in the United States, though still trending higher, the Fed is still set to cut rates later by another 0.25%," said Streeter. "But there’s an expectation that the central bank will go slower next year, given the strength of the US economy."

Meanwhile, sterling was down nearly 0.2% against the euro (GBPEUR=X), trading at €1.2089.

Gold (GC=F)

Gold prices were also flat on Wednesday morning, as investors awaited clues on the Fed's outlook for interest rates next year.

The spot gold price was muted, trading at $2,648.88, while gold futures were trading at $2,663.40.

Lower interest rates tend to be positive for gold, given it's a non-yielding investment.

Deutsche Bank (DBK.DE) macro strategists said that while it was widely expected that there would be another 0.25% rate cut on Wednesday, "the bigger question is what they’ll signal in their dot plot for next year, as there’s been speculation they could pivot in a more hawkish direction".

"Last time in September, the dots pointed to a further 100bps of cuts in 2025," they said. "But since then, the inflation prints have been a bit stronger than expected, so the consensus (and DB’s own forecasts) expect the FOMC to only pencil in 75bps (basis points) of cuts for next year."