By Amanda Cooper

LONDON (Reuters) – The pound edged higher on Wednesday as investor nervousness over the escalating conflict in the Middle East weighed on the dollar. UK data showed consumer inflation barely moved in May, undermining the case for prompt rate cuts.

The Office for National Statistics reported that consumer prices rose by 3.4% annually in May, aligning with forecasts and down from April’s 3.5% rate.

May’s decline resulted from reduced airfares and a correction of a tax data error, while food prices surged at the fastest rate in over a year.

Sterling was last up 0.26% at $1.3462, recovering from $1.3443 before the data release.

The pound fell 1.09% against the dollar on Tuesday, its largest one-day drop since early April, amid escalating conflict between Israel and Iran, which ignited risk aversion among investors favoring the U.S. currency.

By Wednesday, the pound regained some losses as investors focused on UK monetary policy outlook.

“Consumer price inflation hasn’t budged in the UK, remaining at 3.4% for May. While this is slightly better than a price increase, it’s unlikely to persuade more decision makers to vote for a rate cut tomorrow,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

One comforting element for Bank of England policymakers is the decline in service sector inflation, which cooled to 4.7% from 5.4% in April, matching the BoE’s forecast. A Reuters poll had projected a reading of 4.8%.

Money markets indicate traders do not expect the BoE to cut UK rates until at least September, with a possibility of another quarter-point cut by December.