Sterling Takes a Hit as UK Inflation Cools Faster Than Expected to 3.2%

The Pound Sterling experienced significant downward pressure on Wednesday, sliding over 0.5% to trade near 1.3340 against the US Dollar following the release of softer-than-anticipated UK inflation figures. This marks a sharp reversal from the pair’s two-month high above 1.3450 reached just the previous day, signaling growing uncertainty in currency markets.

What Triggered the Sterling Selloff?

The UK’s November Consumer Price Index came in at 3.2% on a year-on-year basis—substantially lower than the 3.5% forecast and October’s 3.6% reading. Core inflation, which strips out volatile items like energy and food, also matched the softer pace at 3.2%, beating expectations of 3.4%. Most notably, headline inflation actually deflated by 0.2% month-on-month, contrary to expectations that it would remain unchanged.

The services sector inflation, which commands particular attention from Bank of England policymakers, decelerated to 4.4% from 4.5% previously. Combined with weakening employment data—where the UK’s unemployment rate climbed to 5.1% in the three months ending October, the highest level in nearly five years—these figures have amplified bets that the BoE will deliver an interest rate reduction at this Thursday’s policy meeting.

Market Reaction: Dollar Bounces Despite Labor Weakness

Interestingly, the US Dollar recovered sharply despite its own labor market showing signs of stress. The greenback bounced back from a fresh 10-week low near 98.00, with the US Dollar Index climbing 0.4% to hover around 98.60. This resilience came even as November’s Nonfarm Payrolls report revealed that the US economy added just 64,000 workers after shedding 105,000 in October, while the unemployment rate ticked up to 4.6%—the highest since September 2021.

Market participants largely attributed the weak employment data to the impact of the historically extended US government shutdown period, which distorted seasonal hiring patterns. Consequently, expectations for Federal Reserve rate cuts have remained subdued. The CME FedWatch tool currently suggests the Fed will maintain rates steady within the 3.50%-3.75% corridor at January’s meeting.

The upcoming US Consumer Price Index release for November, expected Thursday, will be crucial in shaping the Fed’s narrative on monetary policy. Officials have signaled caution about further rate cuts, concerned that easing policy too aggressively could reignite inflation pressures that have persistently exceeded the 2% target.

Technical Backdrop: GBP/USD Holding Pattern

From a technical perspective, GBP/USD maintains an upward bias despite Wednesday’s pullback, with price still trading above the 20-day Exponential Moving Average at 1.3305. The 14-day RSI has fallen to 56, retreating from overbought territory and suggesting some bearish momentum is creeping in.

Fibonacci levels offer important price signposts: the 50% retracement sits at 1.3399 as near-term resistance, while a daily close below the 38.2% level at 1.3307 could accelerate selling toward 1.3200. On the upside, reclaiming Tuesday’s high of 1.3456 would set the stage for a test of the psychological 1.3500 barrier.

Looking Ahead: What Matters for Sterling

The Bank of England’s interest rate decision on Thursday will be the near-term catalyst for Pound movement. A rate cut—now widely expected by markets—would likely weigh further on sterling in the immediate aftermath. Beyond that, traders will be watching how quickly inflation continues its descent and whether UK employment conditions stabilize.

For currency traders, the dynamics between GBP and USD hinge on the comparative policy paths of the BoE and Fed. With the BoE poised to ease while the Fed maintains its hawkish stance, the interest rate differential could continue pressuring sterling valuations. At current exchange levels, one pound is worth approximately 1.33 US dollars, meaning a trader with 630 dollars in pounds would hold roughly 473 pounds sterling—a useful reference point for those tracking exposure across currency pairs.

The Pound Sterling, as the world’s oldest currency since 886 AD and the fourth most-traded in global forex markets (accounting for roughly 12% of daily volumes averaging 630 billion dollars), remains highly sensitive to monetary policy divergence and economic data flows.