The Pound Sterling faced pressure against other major currencies after the UK released its Consumer Price Index (CPI) data for September. The Office for National Statistics reported that core CPI, which excludes food and energy, grew by 3.5% compared to a year ago, but this was below the expected 3.7%. Overall inflation rose by 3.8% annually, while monthly prices remained flat, differing from August’s 0.3% increase. The Bank of England is closely watching inflation in the services sector, currently at 4.7%. Signs of easing price pressures could raise expectations for more interest rate cuts by the BoE. This comes after recent employment data revealed a higher unemployment rate and slower wage growth, leading to a more dovish outlook last week.

British Pound Weakness

The British Pound weakened against major currencies, especially the Australian Dollar. The GBP/USD pair fell to about 1.3310, marking four consecutive days of losses due to rising price pressures and a strong US Dollar. The strength of the US Dollar is partly due to optimism about a US-China trade deal and potential reopening of the US federal government. Market attention is on the upcoming US CPI data and its possible effects on Federal Reserve policy. Economists expect the US headline CPI to rise by 3.1% annually. With today’s lower-than-expected UK inflation numbers, the outlook for the Pound Sterling is now quite negative. Both headline CPI at 3.8% and core CPI at 3.5% missed forecasts, giving the Bank of England clear reasons to think about cutting interest rates sooner. This weakness is reflected in the Pound, which has fallen against all major currencies. We have predicted a dovish shift from the BoE, particularly since rates were kept high throughout much of 2024 to tackle a previous inflation spike. Last week’s weak employment data was the first indication, and this inflation report confirms the trend. It strongly suggests that the next move from the central bank will likely be a rate cut before the year ends.

GBP/USD Pair Dynamics

The situation is more pronounced when examining the GBP/USD pair, currently trading near 1.3310. While UK inflation is cooling, recent US data, including a 3.7% CPI increase from late 2023, shows more persistent price pressures there. This policy divergence, with the Fed possibly keeping rates higher for longer than the BoE, sets the stage for further declines in GBP/USD. For derivative traders, this environment makes buying put options on the Pound a practical strategy for the upcoming weeks. This method allows you to profit from a potential drop in GBP/USD while managing your maximum risk to the premium paid. The growing expectation of rate cuts should support downward momentum. From a technical perspective, the pair’s failure to rise above the 20-day EMA at 1.3407 indicates a bearish trend. The RSI is falling toward 40, signaling a shift in momentum. The next key level to monitor is the support zone around the 1.3140 low from last August. Additionally, it’s crucial to note the broad-based weakness of the Sterling, particularly against the Australian Dollar. This suggests that the market sees the UK’s dovish policy shift as a major factor. Therefore, strategies that involve selling the Pound against currencies with more hawkish central banks, like shorting GBP/AUD, could also be worthwhile. Create your live VT Markets account and start trading now.

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