GBP Tumbles Below 1.3340 as UK Inflation Cools to 3.2% – Rate Cut Signals Strengthen

Sterling faces sharp selling pressure as UK inflation data arrives cooler than expected, fueling expectations for imminent BoE policy easing.

The British Pound has come under intense selling pressure on Wednesday, sliding over 0.5% to trade near 1.3340 against the US Dollar following the release of November’s Consumer Price Index (CPI) data from the United Kingdom. The sharp move reflects growing conviction among market participants that the Bank of England will cut interest rates at its upcoming Thursday policy meeting.

What Triggered the Sterling Selloff?

The Office for National Statistics released UK inflation figures that came in significantly softer than anticipated. Headline CPI expanded at an annualized rate of 3.2% for November, well below analyst forecasts of 3.5% and the prior month’s reading of 3.6%. This marks the second consecutive month showing a deceleration in price growth, suggesting that inflation pressures are gradually returning toward the BoE’s 2% target.

Core inflation – the measure excluding food, energy, alcohol, and tobacco – also printed softer at 3.2% versus expectations of 3.4%. On a month-on-month basis, headline CPI actually declined 0.2%, surprising markets that had braced for a flat print following October’s 0.4% increase.

Services sector inflation, which the BoE monitors closely for policy decisions, cooled to 4.4% from 4.5% previously. Combined with these cooling price pressures, a separate employment report showing the UK jobless rate rising to 5.1% – the highest in nearly five years – has essentially cleared the path for the central bank to lower borrowing costs.

Market Reaction: Dollar Rebounds Despite Weaker US Labor Data

Interestingly, while the Pound retreated, the US Dollar posted a recovery move despite its own labor market headwinds. The Dollar Index (DXY) climbed 0.4% to trade around 98.60 on Wednesday, recovering sharply from a 10-week low near 98.00 posted on Tuesday.

This recovery defied what would normally be expected following the release of disappointing US Nonfarm Payrolls data. In October-November combined reporting, the US economy added just 64,000 workers in November after shedding 105,000 jobs in October. Meanwhile, the US Unemployment Rate rose to 4.6% in November, marking the highest level since September 2021.

Market observers attribute the USD strength to expectations that the most recent data is distorted by the impact of government shutdown activity during the measurement period. Currently, the CME FedWatch tool indicates that the Federal Reserve is likely to maintain the Fed Funds Rate in the 3.50%-3.75% range at its January meeting, suggesting the market has not yet fully priced in aggressive rate-cut expectations despite labor weakness.

What’s Next for Currency Markets?

Investors will now turn their attention to Thursday’s US Consumer Price Index release for November. This inflation report carries outsized importance for Federal Reserve policy direction, particularly given officials’ comments that additional rate cuts could risk re-igniting price pressures that have remained stubbornly elevated above the 2% target for an extended period.

Atlanta Federal Reserve President Raphael Bostic recently emphasized this concern, writing that moving monetary policy into accommodative territory risks “exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers.”

For GBP/USD traders considering exchange rates in practical terms – for example, whether to convert 36 pounds to dollars at current levels – the pair’s directional bias now hinges on the relative policy divergence between the BoE and Fed. A British rate cut with the Fed on hold would typically weigh on Sterling, while any surprise on US inflation could shift that calculus dramatically.

Technical Perspective: GBP/USD Holds Uptrend Despite Pullback

From a technical standpoint, GBP/USD’s pullback to 1.3340 has not derailed the pair’s underlying upward trajectory. The price remains supported above the 20-day Exponential Moving Average at 1.3305, preserving the short-term upside bias.

However, momentum indicators are flashing caution signals. The 14-day Relative Strength Index has retreated to 56, failing to reach overbought territory and suggesting that bearish reversal pressure is mounting. Key levels to monitor include the 50% Fibonacci retracement at 1.3399 as immediate resistance, while a close below the 38.2% retracement at 1.3307 could signal weakness toward the 23.6% level near 1.3200.

On the upside, a sustained close above Tuesday’s high of 1.3456 would target the psychological 1.3500 barrier.

Understanding Sterling’s Role in Global Markets

The Pound Sterling remains one of the world’s most actively traded currencies, with roots stretching back to 886 AD. It ranks fourth globally in FX trading volume, representing approximately 12% of all currency transactions – averaging around $630 billion in daily turnover.

The GBP/USD pairing, known as “Cable” among traders, accounts for roughly 11% of all foreign exchange activity. The Bank of England’s monetary policy decisions – primarily its interest rate adjustments – remain the primary driver of Sterling valuations. When rates rise, the UK becomes more attractive for capital seeking higher yields, strengthening the currency. Conversely, rate cuts typically weigh on Sterling in the near term.

Economic data releases serve as the secondary influence on currency direction. Employment figures, GDP growth, Manufacturing and Services PMI readings, and trade balance reports all provide clues about the economy’s health. Additionally, the Trade Balance indicator – measuring the net difference between exports and imports – can influence currency demand based on foreign buyers’ appetite for British goods and services.

The convergence of cooling inflation, rising unemployment, and expected BoE easing is now the dominant theme shaping Sterling’s near-term trajectory against both the Dollar and other major currency pairs.