BoE Rate Cut on the Table as UK Inflation Surprise Sends Pound Sterling Lower

Softer-than-expected inflation could be the green light the Bank of England needs.

The UK’s November inflation data just landed below forecasts, and the Pound Sterling is feeling the heat. The Office for National Statistics revealed headline CPI came in at 3.2% on an annualized basis—cooler than the anticipated 3.5% and well down from October’s 3.6%. This marks the second consecutive month of easing price pressures, suggesting inflation might finally be tracking back toward the central bank’s 2% comfort zone.

Core inflation—stripping out the volatile stuff like food and energy—also underwhelmed at 3.2% versus expectations of 3.3% and the prior 3.4%. On a month-on-month basis, headline CPI actually deflated 0.2%, a sharper pullback than the flat forecast. Services inflation, which the BoE watches like a hawk, softened to 4.4% from 4.5%.

The employment picture is getting murkier though.

Fresh labor market data for the three months through October showed the ILO Unemployment Rate climbing to 5.1%—the highest since 2019. That combination of cooling inflation and rising joblessness is exactly what could justify a rate cut at the BoE’s Thursday meeting. Investors are already pricing in the shift, betting the central bank won’t sit idle with price pressures retreating and employment concerns mounting.

Cable takes a hit on the data.

The Pound Sterling dove over 0.5% against the US Dollar on Wednesday, sliding toward 1.3340 and reversing gains from the previous day’s climb above 1.3450. The softer CPI surprise knocked the wind out of sterling bulls, though the broader context matters: the US Dollar Index (DXY) actually climbed 0.4% to touch 98.60, bouncing back from a 10-week low near 98.00.

The Dollar’s rebound came despite weak US labor metrics. November’s nonfarm payroll report showed the economy added just 64,000 jobs after shedding 105,000 in October, while unemployment ticked up to 4.6%—the highest since September 2021. Most analysts chalk up the soft numbers to distortions from the government shutdown rather than genuine labor market deterioration. The CME FedWatch tool currently shows traders expect the Federal Reserve to hold rates steady in the 3.50%-3.75% band through January, with officials still wary of unleashing inflation if cuts go too far.

Technically, sterling’s still above the line—for now.

GBP/USD maintains an upward bias despite the daily selloff, as price holds above the 20-day EMA at 1.3305. However, the 14-day RSI has cooled to 56, suggesting bullish momentum might be fading. The 50% Fibonacci retracement at 1.3399 looms as immediate resistance, while a close below 1.3307 could trigger further downside toward 1.3200. Upside breakouts above Tuesday’s high at 1.3456 would target the psychological 1.3500 level.

What’s next? All eyes turn to the US Consumer Price Index data dropping Thursday—how the Fed navigates inflation expectations could ultimately dictate whether the Pound Sterling finds its footing or sinks further against the Dollar in the near term.