UK Inflation Cool to 3.2%, Triggering Sharp Sterling Retreat Against Dollar

The Pound Sterling comes under significant selling pressure on Wednesday, declining over 0.5% to trade near 1.3340 against the US Dollar, as the latest UK inflation figures arrive softer than anticipated. Data released by the Office for National Statistics reveals headline Consumer Price Index growth decelerated to 3.2% annually in November, undershooting analyst expectations of 3.5% and the previous month’s reading of 3.6%.

Cooling Price Pressures Point Toward BoE Rate Cut

The inflation slowdown marks the second consecutive month of moderating headline price growth, signaling that the UK’s battle against rising costs may be gaining traction toward the Bank of England’s 2% target. Core inflation, which strips away volatile food and energy components, also cooled to 3.2% from the prior 3.4%, while month-on-month headline prices actually deflated by 0.2% contrary to expectations of unchanged readings.

Most notably for BoE policymakers, services sector inflation decelerated to 4.4% from 4.5%, easing one of their key concerns. Simultaneously, fresh employment data underscores labor market fragility—the ILO Unemployment Rate climbed to 5.1% in the three months ending October, marking the highest level in nearly five years. These dual developments—subdued inflation and deteriorating employment conditions—significantly strengthen expectations for an interest rate reduction when the BoE convenes for its monetary policy decision on Thursday.

Dollar Rebounds Despite US Labor Weakness

The US Dollar staged a noteworthy recovery, with the Dollar Index climbing 0.4% to approach 98.60, rebounding sharply from a fresh 10-week low near 98.00 recorded a day earlier. This reversal occurred despite November’s Nonfarm Payrolls report revealing persistent labor market headwinds: the US Unemployment Rate ticked up to 4.6%, the highest since September 2021, while November job creation slowed to just 64,000 positions following October’s loss of 105,000 positions.

Market observers attribute the Dollar’s resilience to skepticism about near-term Federal Reserve rate cuts, despite theoretical expectations that weak employment data should trigger more dovish Fed guidance. The CME FedWatch tool currently prices in steady rates within the 3.50%-3.75% band for January’s Fed meeting. Officials have consistently warned that aggressive rate reductions risk reigniting inflation pressures that remain well above target, a concern echoed by Atlanta Federal Reserve President Raphael Bostic, who cautioned that “moving monetary policy near or into accommodative territory risks exacerbating already elevated inflation.”

GBP/USD Technical Position: Uptrend Fading

From a technical perspective, GBP/USD retreated to 1.3340 on Wednesday while maintaining a medium-term upward trajectory, supported by the 20-day Exponential Moving Average positioned at 1.3305. However, the 14-day Relative Strength Index declined to 56 after failing to enter overbought territory, suggesting momentum may be waning. The 50% Fibonacci retracement at 1.3399 now represents immediate resistance, while a close below the 38.2% level at 1.3307 could invite deeper declines toward 1.3200. Conversely, sustained strength above Tuesday’s high of 1.3456 would target the psychological 1.3500 threshold.

What Moves Sterling?

The Pound Sterling, dating back to 886 AD, stands as history’s oldest currency and remains the fourth most actively traded in foreign exchange markets, representing approximately 12% of global FX volume and averaging $630 billion daily. Its primary trading pairs include GBP/USD (accounting for 11% of FX trading volume), GBP/JPY (3%), and EUR/GBP (2%).

Issued by the Bank of England, Sterling’s value primarily reflects monetary policy decisions tied to achieving 2% inflation. When price growth accelerates above target, the BoE raises rates to tighten credit conditions, typically supporting Sterling as higher yields attract international investors. Conversely, when inflation runs too low signaling economic slowdown, rate cuts cheapen borrowing to stimulate growth—a scenario potentially unfolding this week.

Economic indicators significantly influence Sterling valuations. GDP figures, manufacturing and services purchasing manager indices, and employment data all gauge economic vigor and affect currency direction. Strong economic performance attracts foreign capital and encourages rate hikes, bolstering Sterling, while weak data typically weighs on the pound. The Trade Balance also carries importance, as countries with positive export balances benefit from foreign demand for their goods, strengthening their currencies in the process.

Market Watch: Thursday’s CPI and Fed Expectations

Investors will pivot focus to Thursday’s US Consumer Price Index release for November, which carries outsized importance for Fed policy expectations. Any indication of persistent inflation above the 2% target could reinforce Fed caution about premature rate cuts, potentially supporting the Dollar further and adding headwinds to sterling recovery efforts.