Pound Sterling Weakens Sharply as UK Inflation Cools to 3.2%, Triggering BoE Rate Cut Bets

The Pound Sterling is under intense pressure against major currencies following surprisingly soft UK inflation data released Wednesday. The currency slumped over 0.5% to near 1.3340 against the US Dollar, with traders now pricing in a probable interest rate cut from the Bank of England this Thursday.

UK Inflation Surprise Catches Markets Off Guard

The Office for National Statistics delivered inflation figures that came in cooler than expected. The headline Consumer Price Index for November expanded at 3.2% annually—a meaningful miss against the 3.5% forecast and October’s 3.6% reading. Core inflation, which strips out volatile components like food and energy, also underperformed at 3.2% versus the anticipated 3.4%.

On a month-on-month basis, headline CPI actually deflated by 0.2%, a sharp reversal from expectations of a flat reading after October’s 0.4% monthly increase. Services sector inflation—the metric the BoE watches most closely—decelerated to 4.4% from the prior 4.5%.

For currency traders, this data sequence matters enormously. Two consecutive months of decelerating headline inflation suggests price pressures are genuinely trending toward the central bank’s 2% target, making the case for monetary easing substantially stronger.

Employment Weakness Adds to Rate Cut Case

The UK’s labor market is also showing cracks. October’s three-month employment figures revealed the ILO Unemployment Rate climbing to 5.1%—the highest level in nearly five years. This combination of cooling inflation and rising joblessness creates a compelling policy rationale for the BoE to ease borrowing costs.

Market pricing now reflects high confidence in a rate cut decision at Thursday’s monetary policy meeting. The dual narrative of taming price pressures while cushioning labor market deterioration typically justifies lower rates.

Understanding Sterling and Currency Markets: A Quick Primer

The Pound Sterling ranks as the world’s oldest currency (dating to 886 AD) and remains the fourth most actively traded in global forex markets, commanding roughly 12% of all transactions. Daily volume averages around $630 billion. The most popular Sterling pair, GBP/USD (nicknamed “Cable” by traders), alone represents 11% of forex turnover.

The Bank of England, which issues Sterling, anchors policy around maintaining “price stability”—defined as an inflation rate around 2%. Interest rate adjustments serve as the primary tool. When the BoE raises rates, it strengthens Sterling by making UK assets more attractive to international investors. When it cuts rates, the currency typically weakens as yield-hungry capital seeks higher returns elsewhere.

Economic data releases—GDP reports, employment figures, PMI surveys—directly influence Sterling’s valuation. A robust economy attracts foreign investment and may encourage rate hikes, both supportive for the currency. Trade balance figures also matter: positive balances strengthen Sterling through increased demand for exports, while deficits pressure it downward.

US Dollar Bounces Back Despite Soft Jobs Report

Interestingly, the US Dollar recovered ground on Wednesday despite its own labor market challenges. November’s Nonfarm Payroll report showed the US economy added only 64,000 jobs after shedding 105,000 in October. The Unemployment Rate rose to 4.6%—the highest since September 2021.

Theoretically, deteriorating US employment should trigger Fed rate cut expectations. However, the central bank maintains its hawkish stance, with the CME FedWatch tool still pricing in rate stability in the 3.50%-3.75% range for January. Fed officials attribute some of the weakness to the historically long government shutdown that distorted November statistics, and they remain concerned that additional rate cuts could reignite inflation that’s stayed well above the 2% target for an extended period.

Atlanta Fed President Raphael Bostic encapsulated this worry: “Moving monetary policy near or into accommodative territory…risks exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers. That is not a risk I would choose to take right now.”

The US Dollar Index (DXY), tracking the Greenback against six major currencies, rebounded 0.4% to near 98.60. This recovery suggests markets aren’t yet convinced the Fed will pivot to aggressive easing, keeping the Greenback supported despite labor market softness.

Technical Picture: GBP/USD Between Support and Resistance

The GBP/USD pair, currently trading near 1.3340, maintains an upward structural bias despite Wednesday’s pullback. The price continues to hold above the 20-day Exponential Moving Average at 1.3305, a sign that the intermediate trend remains bullish.

However, momentum indicators suggest caution. The 14-day Relative Strength Index has retreated to 56 after failing to reach overbought territory, hinting at potential bearish reversal patterns emerging.

From a technical standpoint, the 50% Fibonacci retracement at 1.3399 (measured from the 1.3791 high to 1.3008 low) represents the immediate resistance level. A daily close below the 38.2% retracement at 1.3307 could signal further weakness toward the 23.6% level around 1.3200. Conversely, a sustained push above Tuesday’s high of 1.3456 would target the psychological 1.3500 barrier.

What’s Next?

The immediate focus shifts to Thursday’s BoE decision and Friday’s US Consumer Price Index release. The Fed’s continued hawkish positioning means any sign of persistent US inflation could keep the Dollar bid, potentially limiting Sterling’s gains even if rate cuts proceed as expected. The coming week will determine whether the Pound can sustain gains or faces fresh selling pressure.