Sterling Under Pressure: UK Inflation Miss Sparks BoE Rate Cut Bets

What just happened to GBP/USD?

The Pound Sterling took a nosedive on Wednesday, slumping over 0.5% to 1.3340 against the US Dollar after the UK inflation data came in hotter than expected—wait, actually colder. The Office for National Statistics just dropped November CPI numbers showing headline inflation cooling to 3.2%, beating expectations of 3.5% and October’s 3.6%. This marks the second consecutive month of easing price pressures, and the market’s reaction? Pound got hammered. Counterintuitive? Not really—softer inflation means the Bank of England has room to cut rates, and that’s typically bearish for sterling in the short term.

The inflation breakdown that matters

Here’s where it gets interesting. Core CPI also came in softer at 3.2% versus the forecast of 3.3% and prior 3.4%. On a month-on-month basis, headline inflation actually deflated 0.2%, a sharp turnaround from October’s 0.4% increase. Services sector inflation, which the BoE watches like a hawk, decelerated to 4.4% from 4.5%. These aren’t minor moves—they’re signaling that UK price pressures are genuinely cooling toward the central bank’s 2% target.

Employment concerns add fuel to the fire

It’s not just inflation softening things up. The UK’s employment data for the three-month period ending October came in weaker than expected, with the ILO Unemployment Rate rising to 5.1%—the highest level in nearly five years. This dual pressure—cooling inflation plus labor market weakness—is basically screaming “rate cut incoming” at the BoE’s December decision. Markets are now pricing in a strong possibility of a cut at Thursday’s monetary policy meeting.

USD bounces back despite domestic weakness

Here’s the twist: while sterling was getting sold off, the US Dollar staged a comeback. The US Dollar Index (DXY) climbed 0.4% to near 98.60 on Wednesday, recovering from Tuesday’s 10-week low around 98.00. Why? Because even though the US Nonfarm Payroll report showed weakness—unemployment rose to 4.6% (highest since September 2021), and the economy added just 64K jobs in November after losing 105K in October—the Fed isn’t exactly rushing to cut rates. The CME FedWatch tool shows the market still pricing in steady rates at 3.50%-3.75% for January. Market participants believe the weak employment data got distorted by the government shutdown disruptions, so it’s not being treated as a genuine signal of economic deterioration.

What’s next? US CPI is the wildcard

The real market mover coming Thursday isn’t just the BoE announcement—it’s the US CPI data for November. This will be crucial for Fed rate-cut expectations. Officials have made clear they’re not comfortable cutting further if it means rekindling inflation, which has stubbornly stayed above the 2% target for ages. Atlanta Fed President Raphael Bostic recently warned that moving policy into accommodative territory risks “exacerbating already elevated inflation and untethering inflation expectations.” That kind of rhetoric tells you the Fed isn’t in a rush despite the weak employment report.

Technical picture: Sterling keeps upward bias but momentum is fading

GBP/USD sits at 1.3340, but the short-term uptrend is intact—price is holding above the 20-day EMA at 1.3305. The 14-day RSI has dropped to 56, failing to reach overbought, which hints at potential reversal signs. Using Fibonacci levels from the 1.3791 high to the 1.3008 low, the 50% retracement at 1.3399 acts as resistance. A close below the 38.2% level at 1.3307 would start looking bearish and could target the 23.6% retracement around 1.3200. Upside-wise, a sustained break above Tuesday’s 1.3456 high opens the door toward the psychological 1.3500 level.

What this means for your portfolio

If you’re sitting on roughly $4000 in pounds, a move from 1.3340 to 1.3500 represents meaningful upside, but Thursday’s BoE decision and the tech levels suggest volatility could intensify. Watch for a close below 1.3307—that’s your signal the downtrend could deepen.