The GBP/USD exchange rate dropped by 0.75% on Wednesday after the UK published encouraging consumer inflation data. Sterling dropped to a low of 1.3327, down from this week’s high of 1.3460.
Bank of England to cut rates as UK inflation falls
The GBP/USD exchange rate pulled back and erased some of the recent gains as investors reacted to the latest UK inflation data. This also explains why the UK bond yields dropped as the FTSE 100 Index rose.
A report by the Office of National Statistics (ONS) showed that the headline Consumer Price Index (CPI) dropped from 3.5% in October to 3.2% in November.
UK’s inflation dropped by minus 0.2% on a MoM basis after rising by 0.3% in the previous month.
Meanwhile, core CPI, which excludes the volatile food and energy prices, dropped by 0.1% on a MoM basis, bringing the annual inflation figure to 3.2%.
More data shows that the retail price index (RPI) dropped from 4.3% to 3.8%, while the Producer Price Index (PPI) dropped from 3.6% to 3.4%.
These numbers mean that the country’s inflation is moving in the right direction, a move that confirms that the Bank of England will cut interest rates by 0.25% in the final meeting of the year on Thursday this week.
The BoE has delivered several interest rate cuts in the past few months, moving from a high 5.25% in August 2024 to the current 4%. As such, a cut will bring the headline interest rates to 3.75%, even as the inflation remains above 2%.
The bank will cut rates as the economy has remained under pressure in the past few months. For example, a report released on Tuesday showed that the unemployment rate rose to 5.1% from the previous 5.0%. The average earnings with bonus dropped to 4.7% from the previous 4.9%.
US consumer inflation data
The next important catalyst for the GBP/USD exchange rate will be the upcoming US consumer inflation report, which will come out on Thursday.
Economists polled by Reuters and Bloomberg expect the upcoming US inflation report will come in at 3.0%, much higher than the Federal Reserve’s target of 2.0%.
Data compiled by Polymarket also places the odds of inflation coming in at 3.0% rising to 44%. It is followed by 3.1%, which is at 42%.
The US inflation report comes a week after the Federal Reserve delivered the third interest rate cut of the year and pointed to one more in 2026.
GBP/USD technical analysis
The daily timeframe chart shows that the GBP/USD exchange rate rose from the psychological level of 1.3000 in November to a high of 1.3460.
It pulled back to a low 1.3327, its lowest level on October 10. It has dropped to the 50-day and 100-day Exponential Moving Averages.
The pair has formed an inverse head-and-shoulders pattern, which is a common bullish reversal sign. Therefore, the pair will likely rebound as bulls target the next psychological level at 1.3500. A move above that level will point to more gains, potentially to the year-to-date high of 1.3725
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