The Pound rose on Wednesday against the Dollar as U.K. consumer price inflation declined to a three-month low in December of 10.5% yet remained near four-decade highs.

At the time of writing, the Sterling edged up 0.3% to $1.2327 and was down 0.1% against the Euro at 87.93 pence.

Britain's inflation figures were essentially in line with consensus forecasts, Reuters reports, with the downward trajectory likely welcome news to the Bank of England and households throughout the country battling with the cost-of-living crisis. 

However, analysts cited a rise in services inflation and accelerating food and drink prices as a concern for policymakers.

"It's important to note that core services jumped from 6.4% to 6.8%, a development that the BoE should particularly take into consideration and when added to yesterday's wage data, should tilt the balance towards a 50 bps hike in February," said ING analysts.

Since December 2021, the Bank of England has increased interest rates nine times in an attempt to reduce inflation. Markets are now pricing in an 82% chance of a 50-basis point increase at next month's meeting.

Sterling is near a six-month top of $1.2446 reached in December, yet fears of recession, the cost-of-living crisis and high inflation impact the U.K.'s economic outlook.

According to RBC currency strategist Adam Cole: "Longer-term, we are still concerned about the imbalance in the U.K. economy, and everything that came to the fore in September around the mini-budget - many of the issues that highlighted haven't changed," emphasising the country's borrowing deficit and current account deficit.

Elsewhere, the Bank of Japan on Wednesday held ultra-low interest rates, going against market forecasts it would phase out its stimulus programme. This led to the Yen sliding against other currencies, with the Pound up 1.6% against the Yen at 160. The U.S. Dollar briefly increased 2.4% to 131.20 Yen following the Bank of Japan's announcement, the largest one-day rise since March 2020.