UK Inflation Surprise Weighs on Sterling: What's Behind the GBP/USD Retreat?

Bank of England Rate Cut Looms as Price Pressures Ease

The Bank of England’s monetary policy decision this Thursday is now firmly in focus after the UK’s inflation figures disappointed markets on Wednesday. November’s Consumer Price Index data showed headline inflation cooling to 3.2% against forecasts of 3.5%, marking a second consecutive month of disinflation. Core inflation similarly came in softer at 3.2% versus the expected 3.4%, while month-on-month prices actually deflated by 0.2% instead of remaining flat as anticipated.

Services sector inflation, a metric the BoE closely monitors, decelerated to 4.4% from 4.5% in the prior period. Combined with deteriorating labor market conditions—the ILO Unemployment Rate hit 5.1% in the three months ending October, a near five-year high—the case for an interest rate cut has strengthened considerably. This economic backdrop explains why the Pound Sterling has come under pressure against its major peers.

Currency Markets React: Why Is the Pound Weaker Against the Dollar?

The Pound Sterling weakened sharply on Wednesday, dipping over 0.5% to trade near 1.3340 against the US Dollar, pulling back from Tuesday’s two-month high above 1.3450. The withdrawal of support stems from two key developments: the softer-than-expected inflation reading and a recovery move in the US Dollar itself.

The underlying reason why the Pound faces headwinds while the US Dollar attracts bids despite weaker employment data requires closer examination. The US Nonfarm Payrolls report for October and November revealed concerning labor market dynamics—November saw only 64,000 new jobs added following a 105,000 job loss in October, while the Unemployment Rate rose to 4.6%, marking the highest level since September 2021. Ordinarily, such weakness might pressure the greenback, yet market sentiment has evolved differently.

The Federal Reserve is widely expected to maintain rates in the 3.50%-3.75% range at January’s policy meeting, according to CME FedWatch data. The divergence in monetary policy outlooks between the BoE and Fed—with UK officials tilting toward accommodation while Fed officials remain cautious about inflation risks—has shifted the relative attractiveness of both currencies. Atlanta Fed President Raphael Bostic recently emphasized the risks of premature rate cuts in an environment where inflation remains elevated.

The US Dollar Index, tracking the greenback against six major currencies, rebounded 0.4% to near 98.60, recovering smartly from a 10-week low near 98.00 set on Tuesday.

Technical Landscape: GBP/USD Navigating Bullish Transition

From a technical perspective, GBP/USD maintains an upward bias despite the recent pullback, as price remains anchored above the 20-day Exponential Moving Average at 1.3305. The 14-day Relative Strength Index fell to 56 after failing to reach overbought extremes, suggesting momentum is moderating but not yet reversing.

The 50% Fibonacci retracement at 1.3399 now acts as near-term resistance. A daily close below the 38.2% retracement level around 1.3307 could shift the tone and invite further declines toward the 23.6% retracement at approximately 1.3200. On the upside, a sustained close above Tuesday’s high of 1.3456 would target the psychological 1.3500 level.

What Comes Next

Investors will now scrutinize the US Consumer Price Index data for November, due Thursday alongside the BoE’s rate decision. The inflation report could meaningfully influence Fed expectations, as officials have signaled that additional rate cuts carry the risk of reigniting price pressures that have remained stubbornly above the 2% target.

The question of why the Pound is performing relatively weakly against the Dollar hinges on this policy divergence: the BoE appears ready to cut amid cooling inflation and labor market softness, while the Fed remains committed to restrictive policy to combat persistent inflation. This differential support has tilted the scales in favor of the US Dollar in the near term, making the Pound Sterling one of the notable underperformers among major currencies.

About the Pound Sterling

The Pound Sterling (GBP) ranks as the world’s oldest currency in continuous use and serves as the official medium of exchange for the United Kingdom. It commands approximately 12% of global foreign exchange trading volume, averaging $630 billion in daily transactions. The most actively traded pairing is GBP/USD, known colloquially as ‘Cable’ and accounting for 11% of FX volume, followed by GBP/JPY (‘Dragon’) at 3% and EUR/GBP at 2%.

Issued by the Bank of England, the Pound Sterling’s value derives primarily from BoE monetary policy decisions. The central bank targets “price stability” through a 2% inflation goal, employing interest rate adjustments as its principal tool. Rate increases enhance GBP’s appeal by making UK assets more attractive to foreign investors, while rate cuts cheapen borrowing to stimulate growth during economic slowdowns.

Economic indicators—GDP releases, manufacturing and services PMIs, employment statistics—directly influence Sterling’s trajectory. A robust economy attracts foreign capital and may prompt BoE tightening, both supportive for GBP. Conversely, weak data tends to pressure the currency lower. Trade Balance figures also matter significantly, as positive net exports strengthen the currency through increased foreign demand for British goods.