GBP Retreats Below 1.3340 as UK Inflation Cools to 3.2%, Triggering BoE Rate Cut Anticipation

Currency Weakness Signals Policy Shift Ahead

The Pound Sterling has come under pronounced selling pressure this week, retreating to approximately 1.3340 against the US Dollar following the release of softer-than-expected UK Consumer Price Index (CPI) data for November. The decline marks a sharp pullback from the previous day’s two-month high near 1.3450, reflecting market repricing of monetary policy expectations.

For context, this movement translates to notable changes in cross-border value; for instance, 17 pounds to dollars exchange rates have shifted accordingly as Sterling weakness amplifies. The Office for National Statistics confirmed that UK headline inflation decelerated to 3.2% on an annualized basis, significantly below the forecasted 3.5% and October’s reading of 3.6%. This represents the second consecutive monthly slowdown, suggesting that price momentum is gradually normalizing toward the Bank of England’s 2% target.

Core inflation, which strips out food, energy, and volatile components, similarly moderated to 3.2% from the prior 3.4%, matching consensus. Month-on-month headline prices actually deflated by 0.2%, contrary to expectations of a flat reading. Most notably, services sector inflation—a closely monitored gauge for BoE policymakers—eased to 4.4% from 4.5%, signaling that wage-driven price pressures may be stabilizing.

Labor Market Deterioration Strengthens the Case for Accommodation

The softer inflation backdrop is reinforced by deteriorating labor market conditions. UK employment data covering the three months ending in October revealed an unexpected weakening trend, with the ILO Unemployment Rate climbing to 5.1%, reaching its highest level in nearly five years. This dual combination of cooling inflation and rising joblessness has substantially elevated market expectations for an interest rate reduction by the BoE at its monetary policy meeting scheduled for Thursday.

The confluence of these factors has triggered a repricing across currency and fixed-income markets, as investors now heavily anticipate the central bank’s next move toward monetary accommodation.

US Dollar Recovers Despite Labor Market Concerns

Meanwhile, the US Dollar has staged a robust recovery, with the DXY Index gaining 0.4% to hover near 98.60. This rebound follows the currency’s slide to a fresh 10-week low near 98.00 on Tuesday, driven by weakness in the combined Nonfarm Payrolls report for October and November.

The employment data revealed that the US economy added just 64,000 new jobs in November after shedding 105,000 in October, while the Unemployment Rate rose to 4.6%—the highest level since September 2021. Paradoxically, despite these labor market headwinds, the Greenback has found demand, suggesting that market participants are discounting distortions caused by the historically prolonged US government shutdown that occurred during the reporting period.

Fed rate cut expectations have not shifted materially. The CME FedWatch tool currently reflects market pricing for the Federal Reserve to maintain interest rates in the 3.50%-3.75% range at its January meeting. Investors are now focused on the US Consumer Price Index release for November, due Thursday, which could significantly recalibrate expectations for future Fed action. Policymakers have emphasized that additional rate cuts risk exacerbating inflation pressures, which remain well above the 2% objective.

Technical Picture: GBP/USD Consolidating Above Key Support

From a technical standpoint, the GBP/USD pair maintains an upward bias despite Wednesday’s pullback to 1.3340, as price continues to trade above the 20-day Exponential Moving Average currently positioned at 1.3305. However, the 14-day Relative Strength Index has declined to 56, falling short of overbought territory and hinting at fading momentum.

Using Fibonacci retracement levels measured from the 1.3791 high to the 1.3008 low, the 50% retracement at 1.3399 presents immediate resistance. A daily close beneath the 38.2% retracement at 1.3307 would weaken the technical picture and invite a test of the 23.6% retracement near 1.3200. Conversely, sustained closing above Tuesday’s high of 1.3456 would clear the way toward the psychological 1.3500 level.

Understanding Sterling’s Role in Global Markets

The Pound Sterling remains the world’s oldest currency, having been in circulation since 886 AD, and holds the position of fourth-most-traded currency in foreign exchange markets. It accounts for approximately 12% of all daily FX transactions, with an average daily turnover exceeding $630 billion based on recent data. The Cable (GBP/USD) alone represents 11% of global FX volume.

Interest rate policy from the Bank of England remains the primary driver of Sterling valuation. The BoE’s mandate centers on achieving price stability through maintenance of a 2% inflation target, with interest rate adjustments serving as its primary policy tool. When inflation pressures intensify, rate hikes strengthen Sterling by attracting foreign capital seeking higher yields. Conversely, when growth slows and inflation falls below target, rate cuts typically weaken the currency as investors seek higher-yielding alternatives.

Beyond monetary policy, economic data releases—including GDP, PMI surveys, and employment figures—materially influence Sterling’s direction. Strong economic fundamentals attract investment flows and can encourage the BoE to maintain or increase rates, supporting the currency. The Trade Balance indicator also plays a significant role: nations with strong export demand see currency appreciation as foreign buyers require local currency to purchase goods, while trade deficits typically pressure valuations.