Sterling Slides Against Dollar as UK Inflation Surprises to Downside—BoE Rate Cut Looms

The British Pound has experienced a sharp retreat on Wednesday, sliding more than 0.5% to test levels near 1.3340 against the US Dollar, as softer-than-anticipated UK inflation data triggered a wave of selling across sterling positions. The move marks a notable reversal from Tuesday’s momentum, when the GBP/USD pair had climbed to two-month highs above 1.3450. For traders monitoring currency crosses, the weakness is equally pronounced across other major pairs, with implications cascading through emerging market conversions—for reference, the equivalent of 4000 AUD to GBP fluctuates with broader dollar dynamics.

UK Inflation Cools Faster Than Expected, Stirring Rate Cut Bets

The Office for National Statistics released November’s Consumer Price Index figures that painted a markedly softer picture than economists had anticipated. Headline inflation decelerated to 3.2% year-over-year, substantially below the consensus estimate of 3.5% and October’s reading of 3.6%. This represents the second consecutive month of disinflation, offering fresh evidence that price pressures are gradually aligning toward the Bank of England’s 2% target zone.

Core inflation—the measure that strips out volatile energy, food, alcohol, and tobacco components—similarly surprised lower at 3.2%, compared to the expected 3.4% print. On a monthly basis, headline prices actually deflated by 0.2%, contradicting expectations for a flat reading. Within sector-specific data, services inflation, a metric closely monitored by BoE policymakers, eased to 4.4% from the prior month’s 4.5%. These successive declines underscore the narrative that the UK’s inflation battle is gradually shifting in the right direction.

Employment Concerns Add Weight to Dovish Narrative

Compounding the case for monetary easing, the UK’s three-month employment survey through October revealed growing labor market fragility. The Institutional Labour Organization unemployment rate climbed to 5.1%, the highest level registered in nearly five years, signaling a material deterioration in job market conditions. This deterioration, combined with the cooling inflation backdrop, has substantially elevated market expectations for a Bank of England interest rate reduction at Thursday’s monetary policy announcement.

The convergence of these two data points—easing inflation coupled with rising joblessness—traditionally creates the theoretical foundation for policy accommodation, though the final decision still rests with the Monetary Policy Committee.

US Dollar Rebounds Despite Mixed Labor Data

Interestingly, despite the Pound’s weakness, the broader sentiment surrounding the US Dollar has proven resilient. The Dollar Index, tracking the Greenback’s performance against six major currency counterparts, firmed 0.4% to hover near 98.60 on Wednesday. This recovery marks a sharp turnaround from Tuesday’s session, when the index had posted a fresh 10-week nadir close to 98.00.

The rebound occurred even as the November US Nonfarm Payrolls report highlighted concerning labor market trends. Job creation slowed dramatically, with the economy adding just 64,000 positions in November after shedding 105,000 in October. The unemployment rate simultaneously edged up to 4.6%, the highest mark since September 2021. Ordinarily, such weakness would trigger aggressive rate cut expectations, yet market analysts attribute some distortion to the extended US government shutdown that overlapped the survey period.

Fed Rate Path Remains Steady for Now

The CME FedWatch tool currently assigns minimal probability to interest rate adjustments at the January Federal Reserve meeting, with market pricing indicating the central bank will maintain its federal funds rate within the 3.50%-3.75% corridor. This stance reflects broader skepticism about imminent policy pivots, despite labor market softness.

The critical wildcard comes Thursday, when the US releases November’s Consumer Price Index data. This inflation report carries outsized importance for Fed communications, as officials have repeatedly signaled that aggressive monetary loosening could reignite price pressures that have remained persistently above target for an extended period. Fed officials including Atlanta Reserve Bank President Raphael Bostic have cautioned that moving policy into accommodative territory too quickly risks “exacerbating already elevated inflation and untethering the inflation expectations of businesses and consumers.”

Technical Outlook: Sterling Holds Support but Momentum Fades

From a technical perspective, the GBP/USD pair has retreated to 1.3340 but continues to trade above a 20-day Exponential Moving Average currently positioned at 1.3305, preserving a mildly constructive intermediate bias. However, the 14-day Relative Strength Index has moderated to 56 after failing to reach overbought extremes, hinting at potential bearish reversal dynamics.

Fibonacci retracement levels drawn from the 1.3791 high to the 1.3008 low establish immediate resistance at the 50% mark (1.3399). A sustained daily close below the 38.2% retracement at 1.3307 would likely weaken the pair’s technical tone and open pathways toward the 23.6% retracement zone around 1.3200. Conversely, a daily close above Tuesday’s high of 1.3456 would target the psychologically significant 1.3500 level.

What Traders Should Watch

The near-term trajectory for sterling hinges on two principal catalysts. First, Thursday’s Bank of England rate decision will likely confirm market expectations of an imminent cut, providing directional clarity. Second, Thursday evening’s US CPI data could either validate or challenge the Fed’s cautious stance toward rate cuts, potentially triggering sharp dollar repricing.

For currency traders and multi-asset portfolio managers, this period represents heightened volatility but also potential opportunity, as policy divergence between the BoE and Fed typically creates sustained directional trends across major pairs.