GBP/USD Weakness Deepens as UK Inflation Cools to 3.2% – What's Next for Sterling?

The Setup: Sterling Takes a Hit on Better-Than-Expected Inflation Cool Down

Wednesday brought mixed signals to currency markets, and the Pound Sterling found itself on the losing end of the trade. The UK’s Consumer Price Index (CPI) for November came in at 3.2% year-over-year—better than the anticipated 3.5% and October’s 3.6%—yet somehow sterling weakened sharply rather than rallied. This counterintuitive move tells us something important about how markets are pricing in interest rate expectations.

The Office for National Statistics (ONS) data revealed headline inflation has now declined for two consecutive months, suggesting price pressures are genuinely cooling toward the Bank of England’s 2% target. Core CPI also moderated to 3.2% versus 3.4% previously expected. On a month-on-month basis, headline inflation actually deflated 0.2%, a notable shift from October’s +0.4% print. Services inflation—the metric BoE policymakers obsess over—ticked down to 4.4% from 4.5%.

Why Sterling Is Falling Despite “Good News”

Here’s the disconnect: softer inflation data combined with deteriorating employment figures has cemented market expectations for a Bank of England rate cut as soon as Thursday’s monetary policy decision. The UK’s three-month employment reading through October showed the ILO Unemployment Rate climbing to 5.1%—the highest level in nearly five years. That combination of cooling prices and rising joblessness screams “rate cut incoming,” which is negative for sterling.

This is where the currency math matters. To put it in perspective: at current GBP/USD levels around 1.3340, someone looking to convert 4000 USD to GBP would get approximately £2,996—down from levels just above 1.3450 the previous day. That’s real money lost on intraday weakness.

US Dollar Bounces Back Despite Its Own Troubles

The US Dollar Index (DXY) has climbed 0.4% to near 98.60 after a brief dip to 98.00 earlier in the week. This recovery is particularly interesting given that US employment data was underwhelming: November’s Nonfarm Payrolls added only 64,000 workers after a revised 105,000 job loss in October. The Unemployment Rate rose to 4.6%—the highest since September 2021.

Normally, weakening US labor data triggers expectations for Fed rate cuts, which should weaken the dollar. However, the market narrative remains controlled by inflation concerns. The Fed has made clear that premature rate cuts risk re-stoking price pressures already well above target. Atlanta Fed President Raphael Bostic captured this sentiment perfectly: “Moving monetary policy into accommodative territory risks exacerbating already elevated inflation.”

The CME FedWatch tool currently shows the market pricing in the Fed holding rates steady at 3.50%-3.75% through January. The next critical data point comes Thursday with the US CPI release—that number will likely dominate Fed rate-cut expectations going forward.

Technical Picture: Sterling Still Biased Higher, But Momentum Is Fading

From a technical standpoint, GBP/USD remains caught between competing forces. The pair sits at 1.3340 but maintains an upward bias as long as price stays above the 20-day Exponential Moving Average (EMA) at 1.3305. However, the 14-day Relative Strength Index has fallen to 56 after failing to reach overbought territory—a potential warning sign of bearish reversal.

The Fibonacci retracement levels offer a useful roadmap. The 50% retracement at 1.3399 serves as immediate resistance. If sterling breaks below the 38.2% level near 1.3307, we could see accelerated downside toward 1.3200 (the 23.6% retracement). On the upside, a sustained close above Tuesday’s high at 1.3456 would target the psychological 1.3500 level.

What Drives Sterling? A Quick Refresher

The Pound Sterling remains the world’s oldest currency (dating to 886 AD) and the fourth most traded in foreign exchange, commanding roughly 12% of global FX volume—approximately $630 billion daily. The Bank of England’s monetary policy is the single dominant factor influencing sterling’s value. The BoE’s core mandate is maintaining price stability around 2% inflation, primarily through interest rate adjustments.

When inflation runs hot, the BoE raises rates to cool things down, making UK assets more attractive to global capital—positive for GBP. When growth slows and inflation cools (as we’re seeing now), rate cuts become likely, which typically pressures the currency. Economic data releases—GDP, employment figures, services PMI—all directly influence sterling’s trajectory. A strong UK economy attracts foreign investment and may justify higher rates, both constructive for the pound.

The Trade Balance metric also matters significantly. Strong export demand from overseas buyers boosts currency demand naturally, while trade deficits create headwinds. Today’s story shows how quickly sentiment can shift when employment numbers deteriorate alongside cooling inflation—it’s a recipe for rate cuts that markets price in almost immediately.

The Bottom Line

Sterling weakness on “good” inflation data reflects the reality that BoE rate cuts are now priced in and likely coming Thursday. Until we see either a reacceleration of UK inflation or stabilization in the labor market, expect continued headwinds for GBP. The technical picture suggests further downside is possible, though the longer-term uptrend remains intact for now.