Sterling Retreats as UK Inflation Cools Below Expectations to 3.2%, Signaling BoE Rate Cut Ahead

Market volatility grips GBP/USD following November’s softer-than-forecast inflation print. The Pound Sterling came under significant pressure during Wednesday’s trading, declining over half a percent to around 1.3340 against the US Dollar, as the UK’s latest inflation figures disappointed expectations. The Office for National Statistics released November Consumer Price Index data showing headline inflation at 3.2% year-on-year, materially below the forecasted 3.5% and October’s 3.6% reading. This marks the second consecutive month of disinflation, strengthening the case for the Bank of England to reduce borrowing costs at its upcoming policy decision Thursday.

Disinflation narrative strengthens policy shift expectations The underlying inflation picture reinforces dovish sentiment. Core CPI, which strips out volatile food and energy components, also disappointed on the upside at 3.2% versus the 3.4% prior reading. Services inflation—a metric closely monitored by BoE policymakers—decelerated to 4.4% from 4.5%, suggesting that sticky wage-driven price pressures are beginning to moderate. On a month-on-month basis, headline inflation contracted 0.2% when economists anticipated a flat reading, signaling accelerating disinflationary momentum.

Labor market deterioration compounds rate cut case Employment conditions deteriorated alongside the inflation data. The UK’s jobless rate climbed to 5.1% in the three-month period through October, marking the highest level in nearly five years and exceeding economist expectations. This combination of cooling inflation and rising unemployment has crystallized market expectations for a BoE rate reduction within days, adding to Sterling’s weakness as traders price in lower future rates.

Dollar steadies despite its own labor market headwinds Paradoxically, the US Dollar Index recovered 0.4% to near 98.60 despite fresh signs of American labor market fragility. November’s Nonfarm Payrolls report showed job creation of just 64,000, following a revision lower of 105,000 positions shed in October. Unemployment rose to 4.6% from September 2021’s highs. Market participants attribute some of this weakness to disruption from extended government shutdowns rather than fundamental economic deterioration, keeping expectations for Federal Reserve rate cuts on hold. When converted at current levels, 17 pounds to dollars yields roughly $21.38 at the 1.3340 exchange rate, reflecting Sterling’s diminished purchasing power relative to the greenback.

Positioning ahead of US inflation data The technical backdrop shows GBP/USD maintaining upside bias above its 20-day exponential moving average at 1.3305, though momentum indicators rolled over. The Relative Strength Index fell to 56, signaling waning bullish conviction. Fibonacci retracement levels at 1.3399 and 1.3307 provide critical support thresholds, with a breakdown below 1.3307 threatening momentum toward 1.3200. Resistance sits at Tuesday’s 1.3456 peak, with psychological significance at 1.3500.

Inflation remains paramount concern for Fed policy The Federal Reserve’s interest rate trajectory hinges critically on the US Consumer Price Index release scheduled for Thursday. Central bank officials, particularly Atlanta Fed President Raphael Bostic, have signaled reluctance to ease policy aggressively while inflation persists substantially above the 2% target. CME FedWatch probabilities indicate traders anticipate the Fed will maintain rates within its 3.50%-3.75% band through January, dismissing recent soft labor data as transitory rather than evidence of economic deterioration requiring rate cuts.

Understanding Sterling’s role in global markets The Pound Sterling, originating as currency in 886 AD, represents the world’s oldest monetary unit and trades as the fourth most liquid FX pair globally. Averaging $630 billion daily turnover across all currency pairs involving Sterling, its principal benchmarks include GBP/USD, which comprises 11% of foreign exchange activity, GBP/JPY accounting for 3%, and EUR/GBP at 2%. The Bank of England’s monetary policy decisions—shaped by its 2% inflation mandate—constitute the primary driver of Sterling valuations. Supporting this framework, economic indicators including GDP, employment figures, and services PMI readings all influence Sterling direction, as do trade balance figures reflecting export competitiveness. Strong economic expansion typically benefits Sterling through both capital inflows and potential rate increases, whereas weakness triggers currency depreciation.