Can the Pound Sterling Reclaim Strength Against the US Dollar? Cooling Inflation Sparks Rate Cut Bets

The Pound Sterling faces considerable headwinds on Wednesday as cooling UK inflation data compels market participants to reassess Bank of England monetary policy expectations. Against the US Dollar, GBP retreated sharply to trade near 1.3340, a decline exceeding 0.5% from the previous day’s two-month highs above 1.3450.

The Inflation Story: UK CPI Falls Below Forecasts

The Office for National Statistics released November Consumer Price Index figures that surprised markets with a notably softer reading. Headline inflation decelerated to 3.2% annualized growth, undershooting economist estimates of 3.5% and October’s 3.6% print. This marks the second consecutive month of disinflation, building momentum toward the 2% target that has eluded policymakers.

The core measure—stripping out volatile food, energy, alcohol, and tobacco components—similarly disappointed forecasts at 3.2%, compared to the anticipated 3.4%. On a month-on-month basis, headline prices actually contracted 0.2%, reversing expectations for a flat reading following October’s 0.4% increase.

Services inflation, closely monitored by BoE officials due to its persistence, moderated to 4.4% from 4.5% previously. These cooling pressures have crystallized market conviction that an interest rate reduction lies ahead at Thursday’s monetary policy decision.

Employment Weakness Tilts the Scales Further

Compounding the rate-cut narrative, the UK’s labor market data for the three-month period ending October came in weaker than anticipated. The ILO Unemployment Rate climbed to 5.1%, marking the highest level in nearly five years. This combination—softer inflation coupled with employment deterioration—substantially increases the probability that the Bank of England will cut rates this week.

The US Dollar’s Counter-Rally

Paradoxically, the Pound’s weakness coincides with a revival in US Dollar strength, despite America’s own deteriorating labor dynamics. The US Dollar Index, measuring the Greenback’s performance against six major trading partners, surged 0.4% to 98.60 following Tuesday’s sharp recovery from a fresh 10-week low near 98.00.

The US Nonfarm Payrolls combined report for October and November painted a concerning picture: the Unemployment Rate reached 4.6%, the highest since September 2021, while November job additions totaled just 64,000 after October’s downward revision of 105,000 losses. Yet market expectations for aggressive Federal Reserve rate cuts have not shifted materially, with analysts attributing the data distortion to the longest US government shutdown in history.

The CME FedWatch tool currently reflects expectations of steady US interest rates in the 3.50%-3.75% range for January’s Fed meeting. Investors will scrutinize this week’s US CPI release for November, a critical inflation gauge that will shape rate cut timing.

Technical Picture: Uptrend Under Pressure

The GBP/USD pair maintains a structurally higher bias while trading above its 20-day Exponential Moving Average at 1.3305, though momentum has visibly faded. The 14-day Relative Strength Index declined to 56, failing to breach overbought territory and signaling potential bearish exhaustion.

Fibonacci retracements provide near-term guideposts. The 50% level at 1.3399 presents immediate resistance, while a daily close beneath the 38.2% retracement at 1.3307 could trigger a downward acceleration toward 1.3200. Conversely, sustained closing above Tuesday’s 1.3456 high would target the psychological 1.3500 barrier.

What Drives Pound Sterling Movements?

The Pound Sterling remains the world’s oldest currency and fourth-most traded in forex markets, representing roughly 12% of daily turnover averaging $630 billion. Its primary trading pairs—GBP/USD (Cable), GBP/JPY (Dragon), and EUR/GBP—anchor most activity.

Bank of England policy decisions form the cornerstone of Sterling valuation. The BoE targets a 2% inflation rate, adjusting interest rates accordingly. Rising rates strengthen GBP by attracting foreign capital seeking enhanced yields, while rate cuts generally pressurize the currency. Economic health indicators—GDP, PMI data, and employment figures—also meaningfully influence Sterling direction, as does the Trade Balance, which captures export-import dynamics and foreign demand for British goods.

The immediate outlook hinges on Thursday’s BoE decision and the week’s US inflation data, both capable of redefining rate-cut expectations and currency positioning.