UK Inflation Cooling to 3.2% Triggers Sharp Pound Sterling Sell-off Against US Dollar

The Pound Sterling experiences significant weakness in Wednesday’s trading session, sliding over 0.5% to approach 1.3340 against the US Dollar as fresh UK inflation data arrives softer than consensus expectations. The movement reflects growing market conviction that the Bank of England may proceed with its anticipated interest rate reduction at the upcoming Thursday policy decision.

Inflation Data Disappoints, But Progress Remains Visible

The Office for National Statistics revealed that November’s headline consumer price inflation decelerated to 3.2% year-on-year, marking a meaningful miss below the 3.5% forecast and the prior month’s 3.6% reading. This represents the second consecutive decline in headline inflation after the metric had stabilized at 3.8% during the summer months, signaling that disinflationary momentum is gradually taking hold.

Core inflation—the measure excluding volatile food and energy components—similarly surprised to the downside, printing at 3.2% versus expectations of 3.4% and October’s 3.4% print. On a month-on-month basis, headline prices actually contracted 0.2%, defying predictions for a flat monthly reading. Service sector inflation, an area of particular focus for policymakers, moderated to 4.4% from the previous 4.5% level.

Employment Weakness Amplifies Rate-Cut Expectations

Beyond the inflation narrative, UK labor market dynamics have deteriorated unexpectedly. The three-month employment report through October showed the ILO Unemployment Rate climbing to 5.1%, the highest level witnessed in nearly five years. This combination of cooling inflation alongside rising joblessness has substantially increased the probability that the Bank of England will deploy a rate cut during this week’s monetary policy gathering.

Dollar Rebound Compounds Sterling Pressure

The US Dollar has simultaneously rebounded from near-term lows despite underlying labor market fragility in the United States. The Greenback surged Wednesday, with the Dollar Index advancing 0.4% to trading around 98.60. This recovery follows a sharp bounce back from fresh 10-week lows near 98.00 that were tested the previous day.

The November US Nonfarm Payrolls report presented a mixed picture: while the economy added only 64,000 positions after shedding 105,000 jobs the prior month, the Unemployment Rate drifted higher to 4.6%—the highest mark since September 2021. Despite these labor market headwinds, the Federal Reserve has maintained steady guidance, with the CME FedWatch tool continuing to price in unchanged rates in the 3.50%-3.75% corridor for January’s policy meeting.

Market observers note that expectations for further Federal Reserve cuts have not shifted materially, as many suspect the latest employment figures were distorted by one of the longest government shutdowns on record. Instead, focus remains riveted on Thursday’s US Consumer Price Index release, which could meaningfully reshape expectations for the Fed’s forward trajectory.

Technical Picture Shows Consolidation Between Key Levels

From a technical standpoint, GBP/USD maintains a constructive uptrend structure despite Wednesday’s retracement. The pair continues to trade above the 20-day Exponential Moving Average currently positioned at 1.3305, preserving the medium-term bullish bias. However, momentum indicators offer signs of caution: the 14-day Relative Strength Index has fallen to 56, retreating from overbought conditions and suggesting potential for a corrective reversal.

Looking at Fibonacci retracements measured from the 1.3791 peak to the 1.3008 trough, the 50% level around 1.3399 now serves as nearby resistance. A daily close beneath the 38.2% retracement at 1.3307 could shift sentiment more negative and encourage movement toward the 23.6% level near 1.3200. Conversely, if sterling reclaims Tuesday’s high of 1.3456, the psychological 1.3500 threshold would enter scope as traders reassess positioning.

What’s Next for Sterling Traders

The immediate outlook for Pound Sterling hinges critically on the outcome of the Bank of England’s rate decision and the subsequent Fed CPI print. With inflation cooling meaningfully and employment concerns mounting, the case for a UK rate cut has strengthened considerably. For perspective, movements in GBP/USD at current levels mean that 14 dollars in pounds converts to approximately £11.08, reflecting the currency pair’s elevated valuation. Should the BoE proceed as expected, downside momentum could intensify unless offsetting strength elsewhere provides support. Conversely, any hawkish messaging from policymakers would provide sterling a much-needed lifeline in what has become a challenging week for the currency.