Pound Sterling Retreats Sharply as UK Inflation Cools to 3.2%, Raising Rate Cut Bets

The Pound Sterling faced significant downward pressure on Wednesday, sliding more than 0.5% to around 1.3340 against the US Dollar following weaker-than-expected inflation readings from the United Kingdom. The decline marks a reversal from the previous day’s two-month peaks, as market participants reposition ahead of potential monetary policy shifts.

Data-Driven Selloff: What Numbers Reveal

The UK’s November Consumer Price Index delivered dovish surprises across the board. Headline inflation decelerated to 3.2% annually—coming in well below consensus forecasts of 3.5% and October’s 3.6% reading. This represents the second consecutive month of moderating price growth, signaling that inflationary pressures may be stabilizing toward the Bank of England’s 2% target.

The core inflation picture tells a similar story, with ex-volatile-components CPI rising just 3.2% versus the anticipated 3.4%. Month-on-month, headline prices actually declined by 0.2%—a surprise deflation after the previous month’s 0.4% gain. Services inflation, a metric closely monitored by BoE policymakers, cooled to 4.4% from 4.5%.

Compounding these soft figures, employment data from the three-month period ending October showed unexpected weakness. The ILO Unemployment Rate climbed to 5.1%, marking the highest level in nearly five years—a reading that amplifies the case for policy accommodation.

Market Implications: Rate Cut Bets Surge

The combination of cooling inflation and deteriorating labor market conditions has substantially increased expectations for a Bank of England interest rate reduction at Thursday’s monetary policy decision. The prospect of lower UK rates has weighed on Sterling valuations, particularly against the US Dollar, as international capital seeks more attractive yield opportunities.

For context, those looking to understand GBP/USD dynamics might consider that 35 pounds to usd conversion rates fluctuate based on these precise monetary policy divergences between central banks.

Dollar Rebounds Despite US Labor Weakness

Meanwhile, the US Dollar staged a recovery despite its own employment softness. November’s Nonfarm Payrolls report revealed only 64,000 new positions—a stark deterioration from October’s 105,000 job losses—pushing the unemployment rate to 4.6%, the highest since September 2021.

However, markets have largely shrugged off these concerns, attributing weakness to distortions from extended government shutdowns. The Fed Funds futures market remains positioned for rates to hold steady in the 3.50%-3.75% range through January, with officials reluctant to aggressively ease policy given persistent inflation above target levels.

The US Dollar Index (DXY) climbed 0.4% to near 98.60, reversing from Tuesday’s 10-week lows as investors rotated back into greenback strength amid expectations of relative monetary policy tightness compared to other major economies.

Technical Outlook: GBP/USD Consolidation Ahead

The GBP/USD pair remains structurally bullish despite Wednesday’s pullback, holding above the 20-day exponential moving average at 1.3305. However, momentum indicators are showing signs of exhaustion—the 14-day RSI has retreated to 56, failing to reach overbought territory.

Key technical levels now matter immensely: the 50% Fibonacci retracement at 1.3399 presents immediate resistance, while a daily close beneath the 38.2% level at 1.3307 could trigger accelerated selling toward 1.3200. To the upside, sustained closes above Tuesday’s high of 1.3456 would target the psychological 1.3500 barrier.

What’s Next: Inflation Data Week

Investors should remain alert to Thursday’s US Consumer Price Index release for November. This inflation reading will be the primary catalyst for reassessing Federal Reserve expectations, particularly as policymakers have signaled deep concern about premature rate cuts reigniting price pressures that remain well above the 2% objective.

The week ahead will test whether recent market positioning—favoring Sterling weakness and dollar firmness—can hold or if incoming data triggers fresh directional conviction.