The GBP/USD pair was observed trading around 1.3360 on Wednesday afternoon, showing a modest recovery following an intraday low of 1.3305. The British pound faced increased pressure after a UK inflation report came in weaker than anticipated, bolstering expectations that the Bank of England may lower rates as soon as December. Headline CPI remained unchanged at 3.8% YoY, which is below the anticipated 4.0%, while core inflation decreased to 3.5% from the previous 3.6%. Markets responded rapidly, as traders are now factoring in 19 basis points of cuts for the December meeting, an increase from 11 bps just one day earlier. The services inflation rate, a key metric for the BoE, held steady at 4.7%. However, the slight easing in broader categories such as food and transport contributed to a resurgence of dovish sentiment among investors. The subdued inflation report aligns with increasing fiscal challenges facing the UK economy. A growing £25 billion budget deficit has compelled Chancellor Rachel Reeves to consider reductions in spending and possible increases in taxes for the forthcoming Autumn Budget, set for November 26.
The combination of these fiscal measures, alongside decelerating growth and increasing debt servicing costs, presents a multifaceted policy challenge for the BoE. Although inflationary pressures have begun to subside, the interplay of subdued consumer demand and fiscal tightening suggests that rate reductions may be warranted in the near term. The current market assessment indicates an approximate 70% likelihood of a rate cut in December. Policymakers continue to exercise caution, as Governor indicates that ongoing services inflation may postpone any aggressive easing measures. The current weakness in GBP/USD also reflects broader market dynamics; the U.S. dollar has exhibited modest strength this week, as evidenced by the Dollar Index maintaining levels near 98.60, bolstered by safe-haven demand and anticipated U.S. data releases. The Federal Reserve is anticipated to reduce rates by 25 basis points during its meeting on October 28–29, contingent upon the results of Friday’s U.S. CPI report. Should the data indicate ongoing inflation, the Fed might opt to halt further easing, thereby providing extra backing to the greenback.
GBP/USD is positioned within a neutral-to-bearish framework. The pair persists in trading beneath its 20-day SMA at 1.3399, indicating that near-term selling pressure is still present. A decisive close above this level could pave the way for a test of the 50-day SMA near 1.3465, while a sustained move above 1.3500 would indicate a more robust recovery phase. On the downside, immediate support is positioned at 1.3300, followed by 1.3248, which marks the swing low from October 14, and subsequently the 200-day SMA at 1.3212. The recent consolidation in the 1.33–1.34 range indicates a pause among traders, who are navigating the conflicting signals of potential BoE easing and the ongoing strength of the U.S. dollar. The BoE continues to be acutely aware of changes in the services sector, which has been the primary factor contributing to persistent inflation over the last year. Despite September’s figure coming in at 4.7%, which was marginally below expectations, decision-makers continue to express caution regarding potential second-round effects stemming from wage growth, which persists at an average of over 6% year-over-year.
Last week’s employment data indicated a cooling momentum, as job vacancies decreased for the ninth consecutive month, strengthening the argument for easing. Nonetheless, the central bank’s prudence arises from the potential danger that premature rate reductions might reignite inflation, especially if energy prices surge again or fiscal policy becomes more expansionary than anticipated. In addition to monetary policy considerations, GBP/USD is influenced by contrasting factors stemming from global risk sentiment and domestic fiscal policy. The reduction of U.S.-China trade tensions, along with positive sentiment regarding possible tariff rollbacks, has contributed to the stabilization of risk assets, offering some support to the pound. The UK’s fiscal constraints and impending tax changes significantly impact investor sentiment. Should there be any indication of a more pronounced decline in UK retail sales or consumer confidence, GBP/USD may approach the 1.3200 level. Conversely, if a Fed rate cut is confirmed next week, it could mitigate the downside and initiate a slight recovery toward the 1.3400–1.3450 range.