GBP/USD – Inflation surprise sends Pound lower

• UK inflation falls to 3.9%, lower than expected.

• British pound declines.

The British pound has declined on Wednesday. In the European session, GBP/USD is trading at 1.2658, down 0.58%.

UK inflation surprises on the downside

UK inflation was lower than expected in November and the surprising release has sent the British pound lower today. Headline CPI eased to 3.9% y/y, down from 4.6% in October and below the consensus estimate of 4.4%. This marked the lowest inflation rate since September 2021. Core CPI rose 5.1% in November, down from 5.7% and below the market consensus of 5.6%. Significantly, both the headline and core readings declined in November on a monthly basis  – headline CPI came in at -0.2% and the core rate at -0.3% and both were lower than expected.

The sharp drop in inflation was driven by lower prices across the economy, including food, fuel, transport, recreation and clothing. The Bank of England will be encouraged by the significant decline in Core CPI, which excludes volatile items such as food and energy and is considered a better gauge of inflation trends than headline CPI.

It was just one week ago that the BoE paused rates but Governor Bailey remained hawkish at the meeting and pushed back against rate cut expectations. Bailey said that rates would remain in restrictive territory for an extended period (‘higher for longer’) and the pound reacted to his comments with sharp gains.

Will the soft inflation report change any minds at the BoE? The decline in inflation should put pressure on the BoE to cut rates next year. However, hawkish policy makers can point to Core CPI and argue that at a clip of 5.1%, it is nowhere near the Bank’s target of 2% and now is not the time to signal rate cuts are coming. It will be interesting to see how BoE officials react to the inflation report and whether the central bank adopts a less hawkish stance as a result.

GBP/USD technical

• GBP/USD has breached support at 1.2711 and 1.2661. The next support level is 1.2590.

• 1.2782 and 1.2832 are the next resistance lines.