UK Inflation Cools to 3.2%, Triggering Sterling Weakness and Rate Cut Expectations

Sterling Under Pressure as Inflation Data Surprises to Downside

The Pound Sterling has experienced substantial weakness across major currency pairs following the United Kingdom’s release of lower-than-anticipated consumer price inflation figures. The GBP/USD exchange rate, a key benchmark for sterling performance, declined sharply by more than half a percent, settling near the 1.3340 level during Wednesday’s trading session. This pullback follows the pair’s earlier two-month peak above 1.3450, underscoring a rapid reversal in sentiment triggered by softer-than-expected economic data.

The Office for National Statistics reported that UK headline inflation for November expanded at an annualized rate of 3.2%, meaningfully undershooting market consensus forecasts of 3.5% and the previous month’s reading of 3.6%. Core inflation, which strips away volatile food and energy components, similarly moderated to 3.2% versus anticipated levels of 3.4% and October’s 3.4% print. On a month-over-month basis, headline prices actually declined by 0.2%, contrasting sharply with economist expectations for a flat reading and October’s 0.4% monthly advance.

Service sector inflation, a metric closely monitored by Bank of England policymakers, decelerated to 4.4% from 4.5%, signaling gradual progress toward the central bank’s 2% target. This consecutive month of cooling price pressures—combined with deteriorating labor market conditions—has substantially increased the probability of an interest rate reduction at the BoE’s upcoming Thursday policy decision.

Employment Weakness Strengthens the Case for Rate Cuts

Recent UK employment data has painted a concerning picture. The International Labour Organization unemployment rate climbed to 5.1% during the three-month period ending in October, marking the highest level in nearly five years. This deterioration in job market conditions, paired with moderating inflation, creates a dual mandate situation where the BoE faces simultaneous pressure from weakening growth indicators and receding price pressures—a combination typically favorable to rate reduction.

US Dollar Rebounds Despite Labor Market Softness

Paradoxically, the US Dollar has strengthened even as American employment figures disappointed. The Unemployment Rate in the United States rose to 4.6% in November, the highest reading since September 2021, while nonfarm payroll additions slowed to just 64,000 in November following an October revision showing 105,000 job losses. The US Dollar Index (DXY), which measures the Greenback against six major currencies, traded 0.4% higher near 98.60 after recovering sharply from a fresh 10-week low near 98.00.

Market participants attributed the dollar’s resilience to uncertainty surrounding inflation dynamics and Federal Reserve policy implications. Despite weaker employment, market expectations for aggressive Fed rate cuts remain subdued. The CME FedWatch tool currently indicates market participants expect the Federal Reserve to maintain interest rates within the 3.50%-3.75% band at January’s policy meeting. Many analysts believe that recent job report distortions stemmed from historically severe government shutdown impacts during the measurement period.

Technical Picture: Sterling Consolidating Above Key Moving Averages

From a technical perspective, GBP/USD maintains an upward structural bias despite Wednesday’s decline to 1.3340. The pair continues trading above its 20-day Exponential Moving Average currently positioned at 1.3305, preserving the intermediate uptrend. However, momentum indicators suggest caution: the 14-day Relative Strength Index has retreated to 56 after failing to achieve overbought conditions, indicating potential bearish exhaustion signals.

Fibonacci retracement levels provide key technical reference points. The 50% retracement at 1.3399 represents immediate resistance, while a daily close beneath the 38.2% level at 1.3307 could trigger additional weakness toward the 23.6% retracement near 1.3200. Conversely, a sustained close above Tuesday’s high of 1.3456 would target the psychological 1.3500 barrier. For reference, the current sterling-to-dollar conversion near 1.3340 means that 17 pounds to dollars equals approximately $23.08, illustrating sterling’s substantial depreciation impact on cross-currency purchasing power for British investors and consumers.

Forward-Looking Catalysts and Policy Implications

The next critical market mover arrives Thursday when US Consumer Price Index data for November hits the market. This inflation reading will substantially influence Federal Reserve expectations, particularly given Fed officials’ recent communications that further rate reductions could reignite price pressures currently residing well above the 2% target. Atlanta Federal Reserve President Raphael Bostic articulated this concern succinctly: “Moving monetary policy near or into accommodative territory, which further Federal Funds Rate cuts will do, risks exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers.”

The divergence between weakening labor markets and persistent inflation above target has created policy tension for central banks. For the Bank of England, moderating inflation combined with deteriorating employment provides clearer justification for rate cuts. For the Federal Reserve, the case remains more ambiguous, supporting the dollar’s relative strength despite softer employment conditions. Investors monitoring GBP/USD should expect continued volatility as competing macroeconomic narratives play out across Atlantic-spanning asset markets.