GBP Takes a Hit as UK Inflation Cools to 3.2% – What It Means for BoE Policy

The Pound Sterling experienced significant downward momentum on Wednesday, retreating more than 0.5% to trade near 1.3340 against the US Dollar. The sharp correction came on the heels of weaker-than-anticipated UK inflation data for November, signaling potential economic headwinds ahead.

The Data That Spooked Sterling Traders

The Office for National Statistics released November’s Consumer Price Index, revealing that headline inflation decelerated to 3.2% on an annualized basis – notably below market expectations of 3.5% and October’s reading of 3.6%. This marks the second consecutive month of slower headline inflation growth, following a stabilization period at 3.8% during the July-September quarter.

Core CPI, which strips out volatile components like food, energy, alcohol, and tobacco, similarly surprised to the downside at 3.2% versus the anticipated 3.4% and prior month’s 3.4%. On a month-on-month basis, headline inflation actually deflated by 0.2%, defying forecasts for a flat reading after October’s 0.4% increase.

The services sector – a key focus for Bank of England policymakers – showed cooling pressures as well, decelerating from 4.5% to 4.4%. These figures collectively reinforce the narrative that price growth is gradually normalizing toward the BoE’s 2% target, though the path remains gradual.

Employment Concerns Add to the Case for Rate Cuts

Beyond inflation, employment conditions have deteriorated. Recent data covering the three months ending in October revealed that the ILO Unemployment Rate climbed to 5.1%, its highest level in nearly five years. This combination of easing price pressures and weakening labor market conditions has substantially strengthened market expectations for an interest rate cut when the BoE convenes for its monetary policy decision on Thursday.

For investors tracking safe-haven assets like precious metals and commodities—including pound of silver and other traditional stores of value—the prospect of lower rates typically supports demand as yield-generating opportunities diminish.

GBP/USD Retracement and Near-Term Technicals

The Pound Sterling reversed sharply after briefly testing two-month highs above 1.3450 on Tuesday. The currency pair now trades under pressure as the US Dollar rebounded simultaneously, with the US Dollar Index (DXY) climbing 0.4% to near 98.60. This recovery follows a push lower to 10-week lows near 98.00 after the release of combined October-November US Nonfarm Payrolls data.

Interestingly, despite the November report showing the US Unemployment Rate rising to 4.6% – the highest since September 2021 – and job additions printing at just 64K after an October revision that showed 105K job losses, the Dollar found willing buyers. Market observers attribute this partly to technical oversold conditions and potential distortions from the extended government shutdown period.

The CME FedWatch tool currently prices in steady Federal Reserve policy at 3.50%-3.75% through January, with no imminent cuts expected despite labor market softness.

Technical Landscape: Uptrend Under Pressure

GBP/USD maintains a short-term upward bias as price holds above the 20-day Exponential Moving Average at 1.3305, yet momentum is fading. The 14-day Relative Strength Index has retreated to 56 after failing to achieve overbought extremes, suggesting potential for a bearish reversal.

Fibonacci retracement levels offer key decision points: the 50% retracement sits at 1.3399, while a daily close below the 38.2% level at 1.3307 could invalidate the uptrend and target the 23.6% retracement near 1.3200. Conversely, a sustained close above Tuesday’s high of 1.3456 would open the path toward the psychological 1.3500 level.

What’s Next: The Fed’s Inflation Challenge

Traders will now pivot focus to Thursday’s release of US Consumer Price Index data for November. This inflation reading assumes critical importance given Federal Reserve officials’ repeated messaging that additional rate cuts risk re-igniting price pressures – a concern particularly acute given that inflation has persistently remained well above the Fed’s 2% target.

Atlanta Federal Reserve Bank President Raphael Bostic recently emphasized this risk calculus, noting that “Moving monetary policy near or into accommodative territory risks exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers.”

The Broader GBP Context

As the world’s oldest continuously circulating currency since 886 AD, the Pound Sterling remains the fourth most actively traded unit in foreign exchange markets, accounting for approximately 12% of all FX transactions and averaging $630 billion in daily volume. Its primary trading pairs – GBP/USD (known as ‘Cable’), GBP/JPY (‘Dragon’), and EUR/GBP – collectively drive the majority of Sterling trading activity.

Monetary policy decisions by the Bank of England remain the primary driver of Sterling valuation. By targeting a steady inflation rate around 2%, the BoE uses interest rate adjustments as its primary tool. Higher rates attract foreign capital and strengthen Sterling, while rate cuts typically weigh on the currency as yield differentials compress.

Beyond policy, economic health indicators including GDP, PMI data, and employment figures directly influence Sterling direction. Similarly, the Trade Balance – measuring the difference between export revenues and import expenditures – plays a material role, as positive balances typically support currency strength through increased foreign demand for domestic goods and services.