Sterling Weakens as UK Inflation Surprises to Downside at 3.2%, Signaling Rate Cut Path

The world’s oldest currency—the British Pound Sterling—came under significant selling pressure on Wednesday as UK inflation data delivered a stronger-than-expected cooldown, intensifying bets on monetary easing from the Bank of England. The GBP/USD pair, which accounts for roughly 11% of all foreign exchange transactions and averages $630 billion daily, retreated sharply to 1.3340, wiping out gains from the prior session.

Inflation Cools More Than Anticipated

The Office for National Statistics revealed that UK headline Consumer Price Index inflation decelerated to 3.2% annually in November—markedly below the 3.5% forecast and October’s 3.6% reading. This marks the second consecutive month of disinflation following a stable 3.8% rate in the summer quarter, raising confidence that price growth is genuinely tracking toward the BoE’s 2% target.

Core inflation, which strips out volatile food, energy, alcohol, and tobacco components, also softened to 3.2% versus the anticipated 3.4% and prior month’s 3.4%. On a month-on-month basis, headline prices actually deflated 0.2%—a surprise given expectations for a flat reading after October’s 0.4% climb. Services inflation, the metric most closely monitored by BoE policymakers, decelerated to 4.4% from 4.5%, suggesting wage-driven price pressures may be finally moderating.

Labor Market Deterioration Compounds Rate-Cut Case

Complicating the UK employment picture, jobless data for the three-month period ending October disappointed forecasters. The ILO Unemployment Rate jumped to 5.1%, the highest level in nearly five years, intensifying concerns about economic slack. When combined with cooling inflation, these developments have substantially strengthened the narrative for a Bank of England interest rate reduction at this week’s policy decision.

Sterling’s Technical Picture Remains Supported Despite Near-Term Pullback

Despite Wednesday’s decline, GBP/USD maintains an upward bias, trading above the 20-day Exponential Moving Average at 1.3305. The 14-day Relative Strength Index has fallen to 56, retreating from overbought territory and flashing early warning signs of momentum exhaustion.

From a Fibonacci perspective, measured between the 1.3791 peak and 1.3008 trough, the 50% retracement at 1.3399 now poses immediate overhead resistance. A daily close below the 38.2% level (1.3307) could undermine the established uptrend and clear a path toward the 23.6% retracement near 1.3200. Conversely, a sustained break above Tuesday’s 1.3456 high would pave the way toward the psychologically significant 1.3500 barrier.

Dollar Rebound Limits Sterling’s Upside

The greenback bounced back despite underlying labor market fragility. The US Dollar Index—which measures the currency against six major peers—climbed 0.4% to near 98.60 on Wednesday, recovering sharply from a 10-week low close to 98.00 set following the combined October-November Nonfarm Payroll report.

That employment data showed the US Unemployment Rate rising to 4.6% in November, the highest since September 2021, with only 64,000 net new workers added in November following a 105,000 job loss in October. Market watchers attribute much of this weakness to disruption from the historically protracted US government shutdown. The CME FedWatch tool currently prices in Federal Reserve rates holding steady in the 3.50%-3.75% band when the central bank meets in January.

What Lies Ahead

The forthcoming US Consumer Price Index release for November on Thursday will prove decisive for Fed rate-cut expectations. Officials have repeatedly emphasized concerns that premature monetary accommodation could reignite inflation, which has lingered uncomfortably above the 2% objective for an extended period. As Atlanta Federal Reserve President Raphael Bostic recently cautioned, moving policy into genuinely accommodative territory “risks exacerbating already elevated inflation” and unmooring expectations.

The Pound Sterling, as the fourth most actively traded currency globally, remains sensitive to any shifts in central bank calculus on both sides of the Atlantic. This week’s data releases and policy meetings will be instrumental in determining whether sterling can sustain its recent gains or faces further mean reversion.