Sterling Retreats as UK Inflation Cools to 3.2%, Historic Currency Under Pressure

Market Volatility: GBP/USD Slides Amid Data Surprise

The Pound Sterling, the oldest currency in modern forex markets, experienced sharp selling pressure on Wednesday, declining more than 0.5% to trade near 1.3340 against the US Dollar (USD). This pullback followed the release of surprisingly dovish UK inflation readings, catching traders off-guard after the pair had climbed above 1.3450 in the previous session.

The retreat stems from the Office for National Statistics’ November Consumer Price Index (CPI) release, which revealed headline inflation at 3.2%—a meaningful undershoot versus the 3.5% forecast and October’s 3.6% reading. Core inflation similarly surprised to the downside, settling at 3.2% compared to expectations of 3.4%.

Disinflation Momentum Builds, BoE Rate Cut Prospects Strengthen

The disinflationary trend marks the second consecutive month of easing price pressures, signaling that the UK economy is progressing toward the Bank of England’s 2% target. Month-on-month headline CPI actually deflated 0.2%, reversing October’s 0.4% increase and suggesting underlying demand is softening.

Particularly noteworthy for BoE policymakers, services sector inflation decelerated to 4.4% from 4.5%, an indicator the central bank monitors closely when setting monetary policy. Combined with concurrent employment data showing the ILO Unemployment Rate surging to 5.1%—the highest level in nearly five years—market participants are now pricing in an increased probability of interest rate cuts at the BoE’s monetary policy decision on Thursday.

This employment weakness adds another layer to the case for accommodation, as labor market cooling typically precedes broader economic slowdown and justifies preemptive policy easing.

US Dollar Rebounds Despite Soft Labor Data

While Sterling stumbled, the US Dollar staged a recovery, with the Dollar Index (DXY) rallying 0.4% to near 98.60. This rebound reversed Tuesday’s plunge toward 98.00 following the release of November’s Nonfarm Payrolls report.

The US jobs data painted a mixed picture: the Unemployment Rate climbed to 4.6%—the highest since September 2021—while payroll growth weakened dramatically, with only 64,000 jobs added in November after a revised 105,000 decline in October. Market observers have attributed much of this volatility to distortions from the lengthy US government shutdown that occurred during the period.

Despite these softer employment conditions, the Federal Reserve’s interest rate cut expectations have remained largely anchored, with markets currently pricing in steady rates at 3.50%-3.75% through the January meeting per CME FedWatch data. Fed officials have indicated that reducing rates too aggressively could re-ignite inflation pressures that remain stubbornly elevated above the 2% target.

Technical Setup: Sterling Consolidating Above Key Support

From a technical perspective, GBP/USD maintains an upward-tilted structure despite Wednesday’s pullback. The pair continues to hold above its 20-day Exponential Moving Average (EMA) positioned at 1.3305, preserving the intermediate-term bias.

However, momentum indicators are fading. The 14-day Relative Strength Index (RSI) has fallen to 56 after failing to reach overbought territory, hinting at potential exhaustion in the prior rally. Using Fibonacci analysis from the 1.3791 high and 1.3008 low, the 50% retracement at 1.3399 represents immediate overhead resistance.

A daily close beneath the 38.2% retracement level near 1.3307 would signal strengthening bearish pressure, potentially opening downside toward the 23.6% Fibonacci support around 1.3200. Conversely, a sustained break above Tuesday’s peak of 1.3456 would target the psychological 1.3500 milestone.

The Pound Sterling: Understanding the Oldest Currency in FX Markets

The Pound Sterling (GBP), issued by the Bank of England, holds the distinction of being the world’s oldest currency, with origins tracing to 886 AD. As a globally significant reserve currency, GBP ranks as the fourth-most traded unit in foreign exchange, commanding approximately 12% of all daily FX transactions—around $630 billion in average daily volume according to 2022 data.

The GBP/USD pair, colloquially known as “Cable,” accounts for roughly 11% of total FX trading, while GBP/JPY (“the Dragon”) and EUR/GBP represent 3% and 2% of volumes respectively.

Monetary Policy Transmission: The Bank of England’s interest rate decisions form the primary driver of Sterling’s valuation. The BoE targets “price stability” through a steady inflation rate of approximately 2%. When inflation exceeds target, the BoE tightens monetary policy by raising rates, making UK assets more attractive to global investors and typically strengthening Sterling. Conversely, when growth stalls and inflation falls, rate cuts cheapen credit conditions to stimulate borrowing and investment, though this typically pressures the currency.

Economic Data Sensitivity: Major economic indicators—including GDP, Manufacturing and Services PMIs, employment figures, and Trade Balance data—significantly influence Sterling’s direction. Strong economic readings attract foreign investment and may prompt the BoE to maintain or raise rates, supporting the currency. Weak data typically drives Sterling lower. The Trade Balance metric is particularly important, as countries with positive net export balances benefit from foreign demand, strengthening their currency.

Looking Ahead: US CPI and Fed Guidance

The immediate near-term focus shifts to Thursday’s US Consumer Price Index (CPI) release for November. This inflation reading will be crucial for calibrating Federal Reserve policy expectations, particularly given officials’ stated concerns that premature rate cuts could reignite price pressures above the 2% target.

Atlanta Federal Reserve President Raphael Bostic recently cautioned against aggressive easing, noting that moving policy into “accommodative territory” through further cuts “risks exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers”—a perspective suggesting the Fed may proceed cautiously despite labor market softness.