GBP/USD dropped below 1.3400 after the UK’s inflation report came in lower than expected, ahead of the Bank of England’s (BoE) policy decision. At the report’s release, GBP/USD was trading close to 1.3350, down by 0.48%.
In November, the UK Consumer Price Index (CPI) fell from 0.4% month-on-month to -0.2%, missing the forecast of 0%. Year-on-year, it declined from 3.6% to 3.2%, which was also below the expected drop to 3.5%. This data led the market to fully anticipate a 25-basis-point rate cut by the BoE to 3.75% for Thursday.
US Economic Outlook
The focus is now on the upcoming US CPI and jobless claims data. Estimates predict that 225,000 Americans will apply for unemployment benefits. Technical analysis indicates that GBP/USD had a slightly bearish momentum, with the Relative Strength Index suggesting there might be more upside potential.
The table shows that the British Pound performed best against the Australian Dollar this week. It also lists percentage changes against other major currencies. A currency heat map example illustrates GBP as the base currency and USD as the quote, showing specific percentage changes.
The significant drop in UK inflation to 3.2% is the headline, falling short of the anticipated 3.5%. This almost guarantees the BoE rate cut for tomorrow. Markets are now fully expecting a 25-basis-point cut to 3.75%, leaving little chance for a hawkish surprise.
In contrast, the US Federal Reserve does not seem eager to cut rates. According to the CME’s FedWatch Tool, the market sees only a 15% chance of a Fed rate cut in the first quarter of 2026. Attention now shifts to tomorrow’s US CPI and jobless claims data to highlight this policy difference.
Market Sentiment and Technical Analysis
Given this outlook, we should expect continued downward pressure on the GBP/USD pair. The options market reflects this sentiment, with one-month risk reversals for GBP/USD falling to -0.45. This suggests traders are paying more to hedge against a further decline in the pound, marking the most bearish sentiment we’ve seen since the third quarter.
A break below the 200-day moving average around 1.3345 seems likely, which would pave the way to the 1.3300 level. We should consider buying puts or establishing bear put spreads targeting this area in the coming weeks. The key will be to see if the pair stays below the 1.3400 mark after the BoE announcement.
This situation is similar to what we observed in 2023 when aggressive Fed tightening strengthened the dollar against other major currencies. The growing gap between a dovish BoE and a patient Fed could create similar trends into early 2026. We are positioning for a stronger dollar against a weaker sterling.
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