Sterling Weakens as UK Inflation Cools Below Forecasts to 3.2%

Sterling faces renewed selling pressure following softer-than-anticipated UK inflation print, rekindling expectations for Bank of England rate cuts.

The British Pound has come under intense downward pressure midweek, retreating over half a percent to trade near 1.3340 against the US Dollar following November’s consumer price data. The currency’s weakness reflects market recalibration after inflation figures came in significantly below analyst expectations, prompting fresh speculation about the BoE’s policy trajectory ahead of Thursday’s crucial monetary decision.

The Inflation Surprise That Shifted Market Sentiment

November’s headline CPI reading of 3.2% represented a material surprise to the downside, undercutting the consensus forecast of 3.5% and extending the recent disinflationary trend that saw October’s 3.6% reading. The sequential deceleration marks the second consecutive month of declining price pressures, a meaningful shift after inflation had stabilized in the 3.8% range during the summer months.

Supporting this narrative, core inflation—the measure excluding volatile components like food, energy, alcohol, and tobacco—similarly came in at 3.2%, better than both economist expectations and the previous month’s 3.4% print. Month-on-month headline prices actually deflated by 0.2%, confounding expectations for flat readings. The services sector, which commands considerable attention from central bank officials, moderated to 4.4% from 4.5% previously.

Labour Market Weakness Compounds Rate-Cut Expectations

Complicating the picture, the latest employment survey for the three-month period ending October revealed labour market deterioration. The ILO Unemployment Rate climbed to 5.1%, marking the highest level in nearly five years and amplifying concerns about economic slack. This combination—weakening inflation coupled with rising joblessness—has strengthened the case for interest rate relief.

Sterling’s Technical Position Amid Shifting Dynamics

The GBP/USD pair currently sits at 1.3340 after trading as high as 1.3450 the previous session. The immediate technical landscape shows the pair holding above its 20-day Exponential Moving Average at 1.3305, preserving a tentative upward bias despite Wednesday’s pullback. However, the 14-day Relative Strength Index has retreated to 56, showing momentum dissipation and potential early signs of bearish pressure.

From a Fibonacci perspective (calculated from the 1.3791 high to the 1.3008 low), the 50% retracement level at 1.3399 represents the nearest overhead resistance. Should the pair close below the 38.2% retracement at 1.3307, it could open the door to further weakness toward the 23.6% level around 1.3200. Conversely, a sustained push above Tuesday’s peak at 1.3456 would target the psychological 1.3500 threshold.

Dollar Recovery Defies Weak Jobs Data

Interestingly, the US Dollar has rebounded despite concerning employment data from across the Atlantic. The Dollar Index, measuring the greenback against six major peers, has climbed 0.4% to near 98.60 on Wednesday, recovering sharply from Tuesday’s 10-week low near 98.00. This rebound follows the combined October-November NFP report, which showed the US unemployment rate rising to 4.6%—the highest since September 2021—alongside a disappointing 64,000 new jobs added in November after a 105,000 revision lower for October.

Market observers attribute the Dollar’s resilience to the distorting effects of the historically prolonged US government shutdown, which likely depressed job creation figures. Currently, the CME FedWatch tool indicates virtually no probability of Federal Reserve rate changes in January, with rates expected to remain anchored in the 3.50%-3.75% range.

The critical test arrives Thursday with the November US CPI release, which will prove instrumental in shaping monetary policy expectations. Federal officials have signaled concern that further rate reductions could reignite inflationary pressures, particularly given headline inflation’s persistent overshooting of the 2% target. Atlanta Federal Reserve President Raphael Bostic recently cautioned that “moving monetary policy into accommodative territory risks exacerbating already elevated inflation,” suggesting the Fed remains cautious despite labour market softness.

Understanding Sterling’s Role in Global Markets

The Pound Sterling represents a cornerstone of international finance, serving as the oldest continuously issued currency since 886 AD and commanding approximately 12% of all daily foreign exchange volume—roughly $630 billion in average daily transactions. The GBP/USD pairing, known colloquially as ‘Cable,’ alone accounts for 11% of all FX activity, making moves in this pair significant bellwethers for broader market sentiment.

The Bank of England’s policy framework centers on achieving price stability through a target 2% inflation rate. When inflation exceeds this objective, the BoE typically raises rates to constrain credit availability and cool demand. Conversely, when growth signals weaken, rate cuts become possible to stimulate borrowing and investment. The relationship between interest rate differentials and currency valuation means that rate-cut expectations invariably weigh on Sterling, as they reduce the yield advantage attracting foreign capital.

Beyond monetary policy, Sterling responds to broader economic health indicators including GDP, employment, PMI data, and trade balances. A robust economy attracting foreign investment typically strengthens the currency, while weak data tends to trigger outflows and depreciation pressure.