The UK inflation data released on Wednesday put pressure on the British currency, including against the dollar. The GBP/USD pair has broken below the support level of 1.3100 (the lower boundary of the Kumo cloud on the four-hour chart) and is currently trying to stabilize within the 30-figure range.
Almost all components of the report came in at the forecast level, but annual figures reflected a slowdown in inflation. Both the overall and core indicators showed a downward trend. This result suggests that the Bank of England may reduce the interest rate by 25 basis points at its next meeting in December.
According to published data, the UK consumer price index (CPI) accelerated to 0.4% month-over-month. Year over year, the figure slowed to 3.4%, the lowest level since May of this year. The core CPI, excluding energy and food prices, also slowed to 3.4%. This indicator has been declining for two months, with October marking the third consecutive month of decrease. The retail price index (RPI), used by employers in salary negotiations, fell to 4.3% from 4.5% the previous month. A downward trend has also been established here; the index dropped to 4.6% in August, to 4.5% in September, and to 4.3% in October (the lowest level since May of this year).
All these figures were at the forecast level, while the producer price index (PPI), which is based on raw material price movements, fell into the "red zone": month-over-month, the indicator remained in negative territory, decreasing to -0.3% (against a forecast of 0.0%), while year-over-year it dropped to 0.5% (against a projected increase of 0.7%).
The report's structure indicates that price growth in the "housing and utility services" category slowed to 5.2% from 7.3% the previous month. The most noticeable declines in inflation rates were observed in natural gas (2.1% vs. 13.0% in September) and electricity (2.7% vs. 8.0%), thanks to the reduction in price caps by Ofgem (the UK's energy market regulator). Prices in the "restaurants and hotels" segment also decreased (3.8% vs. 3.9%), as did prices for services overall (4.5% vs. 4.7%) and for clothing and footwear (0.3% vs. 0.5%).
At the same time, inflation in the "transport" category remained at 3.8%. Prices for food and non-alcoholic beverages increased by 4.9% (after rising by 4.5% in the previous month). Prices for entertainment also rose (2.9% vs. 2.7%).
Reacting to this report, sellers of the GBP/USD pair found themselves in the 30-figure range and are currently trying to consolidate below the support level of 1.3100 (the lower boundary of the Kumo cloud on H4).
Overall, the report released on Wednesday significantly increases the likelihood of a rate cut by the Bank of England at its December meeting, especially given weak labor market data and the growth of the UK's GDP. Yet, there is one "but."
The current decline in inflation is associated mainly with temporary factors—primarily a sharp easing of pressure from gas and electricity prices after the update of the Ofgem price cap, as well as seasonal declines in air fares and hotel services. Meanwhile, specific components of inflation continue to demonstrate resilience: food prices have accelerated again, and core inflation (excluding energy and food) has decreased only slightly, remaining quite high. All this indicates sustained internal price pressure—in services, wages, and supply chains. Thus, the current slowdown in inflation is more a combination of temporary factors and partial (but not complete) easing of core pressure.
This suggests that the results of the December meeting will depend on November's inflation dynamics. It should be noted that the November CPI growth report will be published just one day before the BoE's last meeting of the year.
Yet the fact remains: after the latest publication, the probability of a rate cut has increased, putting pressure on the pound. Meanwhile, the dollar is strengthening amid weakening "dovish" expectations for the Federal Reserve's future actions. Market confidence is growing that the Fed will not lower rates in December, as the BLS will not be able to publish the U.S. labor market report for October. In my opinion, this is a highly debatable assertion, as much will depend on the September Non-Farm Payrolls, which will be released tomorrow, November 20. Suppose the employment figure unexpectedly collapses into negative territory; can the dollar maintain its current position? This is far from a rhetorical question.
Thus, despite the relatively strong bearish momentum, selling GBP/USD appears risky, even against a weakening British pound that cannot "play its game" in the near future. The intrigue surrounding the September Non-Farms persists, suggesting the compressed spring could fire in both directions. Given the uncertainty around the pair, it is advisable to adopt a wait-and-see approach.
