The Pound Sterling experienced pressure against its major peers following the UK’s Consumer Price Index (CPI) data release for September. The Office for National Statistics reported that core CPI, excluding food and energy, rose by 3.5% annually, falling short of the predicted 3.7%. Headline inflation increased by 3.8% annually, while monthly prices stayed flat compared to August’s 0.3% rise.
The Bank of England continues to monitor inflation in the services sector, maintaining a rate of 4.7%. Indications of reduced price pressures could increase expectations for further rate cuts by the BoE. This comes after employment data showing a higher jobless rate and slower wage growth, which increased dovish expectations last week.
British Pound Weakness
The British Pound weakened significantly against major currencies, especially the Australian Dollar. The GBP/USD pair dropped to a weekly low of approximately 1.3310, extending losses for the fourth day due to peaking price pressures and a strong US Dollar.
The US Dollar’s strength is partly due to optimism about a US-China trade deal and potential reopening of the US federal government. Market focus remains on the upcoming release of US CPI data and its potential impact on the Federal Reserve’s monetary policy. Economists anticipate the US headline CPI to grow by 3.1% annually.
Given today’s lower-than-expected UK inflation numbers, the outlook for the Pound Sterling has turned decidedly bearish. The headline CPI at 3.8% and core at 3.5% both missed forecasts, giving the Bank of England (BoE) a clear reason to consider cutting interest rates sooner. This weakness is already visible, with the Pound falling against all major currencies.
We have been anticipating a dovish turn from the BoE, especially after rates were held high through much of 2024 to combat the inflation spike we saw a couple of years back. Last week’s softer employment data was the first sign, and this inflation report confirms the cooling trend. This provides a strong signal that the next move from the central bank is likely to be a rate cut before the year is out.
GBPUSD Pair Dynamics
The situation is amplified when we look at the GBP/USD pair, which is trading near 1.3310. While UK inflation is cooling, recent data from the United States, such as the 3.7% CPI print we saw in late 2023, shows price pressures there have been more persistent. This policy divergence, with the Fed potentially holding rates higher for longer than the BoE, creates a fundamental case for further GBP/USD downside.
For derivative traders, this environment suggests that buying put options on the Pound is a viable strategy for the coming weeks. This approach allows for profiting from a potential decline in GBP/USD while defining the maximum risk to the premium paid. The increased expectation of rate cuts should fuel downward momentum.
From a technical standpoint, the pair’s failure to break above the 20-day EMA at 1.3407 is a bearish confirmation. With the RSI dropping towards 40, momentum is shifting downwards. The next significant level to watch is the support zone around the 1.3140 low from August of last year.
It is also important to note Sterling’s broad-based weakness, especially against the Australian Dollar. This suggests that the market is singling out the UK’s dovish policy shift as a key driver. Therefore, positions that involve selling the Pound against currencies backed by more hawkish central banks, such as shorting GBP/AUD, could also be considered.
