Sterling falls 0.7% against the dollar amid speculation of accelerated Bank of England easing cycle
LONDON — The British pound suffered significant losses against the U.S. dollar on Wednesday, dropping 0.7% to trade near 1.3330 after touching an intraday low of 1.3311. The currency's decline followed unexpectedly weak inflation data that reinforced market expectations for imminent Bank of England rate cuts and sparked speculation about faster monetary easing in 2025.
Disappointing Inflation Figures Shift Policy Outlook
Official data from the Office for National Statistics revealed UK consumer prices rose just 3.2% year-over-year in November, significantly below both the 3.5% consensus forecast and October's 4.7% reading. Core CPI, which excludes volatile food and energy prices, increased 4.0% versus expectations of 4.4%.
The softer-than-expected inflation numbers have intensified pressure on the Bank of England to begin cutting interest rates as early as this week's policy meeting. Market pricing now suggests approximately 69 basis points of total easing by 2026, up from 67 basis points before the CPI release.
More notably, traders have brought forward expectations for the next full 25-basis-point reduction to April 2026 from July 2026 previously, signaling growing anticipation that policymakers may accelerate the pace of monetary loosening next year to combat persistently weak price pressures and potential economic slowdown.
Technical Breakdown Adds Downward Pressure
The pound's technical picture has turned decidedly bearish, with GBP/USD breaking below key hourly moving averages for the first time since November 24. The breach of both the 100-hour (currently at 1.3375) and 200-hour (1.3385) moving averages suggests short-term momentum has shifted decisively to the downside.
On daily charts, the convergence of the 100-day (1.3345) and 200-day (1.3359) moving averages forms a critical resistance zone. The pair's current downward trajectory threatens to break through this area, which would further confirm the bearish bias. A sustained move below 1.3300 could open the door for more substantial declines.
Dollar Strength Compounds Sterling's Woes
The pound's weakness coincided with broad U.S. dollar strength, creating a double burden for GBP/USD. The dollar index (DXY) rose on Wednesday as markets continued to price in a more hawkish Federal Reserve policy path compared to other major central banks.
While the greenback has shown vulnerability in December, its recent rebound has removed one potential support for sterling. The dollar's status as the global reserve currency means its appreciation typically creates headwinds for other currencies by reducing their relative purchasing power.
Holiday Liquidity Concerns
With just three full trading days remaining before Christmas, market participants face thinning liquidity that could amplify price movements. The reduced participation typical of holiday periods makes interpreting market moves more challenging, as smaller trades can have outsized impacts on currency valuations.
This environment warrants caution, as illiquid conditions may lead to exaggerated volatility that doesn't necessarily reflect fundamental shifts in market sentiment. Traders may adopt more conservative positioning to avoid being caught in erratic, low-volume price swings.
Policy Divergence in Focus
The pound's trajectory will likely hinge on the evolving policy divergence between the Bank of England and Federal Reserve. While markets now expect the BOE to cut rates sooner and faster than previously anticipated, the Fed has maintained a more hawkish stance despite recent progress on inflation.
This week's BOE meeting takes on added significance following the inflation surprise. Policymakers must balance the need to support economic growth against their inflation mandate, with recent data suggesting price pressures are easing faster than expected.
Meanwhile, the UK economy continues to face multiple challenges including high energy costs, supply chain disruptions, and the lingering effects of Brexit. These structural headwinds may limit sterling's upside potential even if the central bank maintains a more cautious approach to rate cuts than currently anticipated.
As markets enter the holiday period, sterling traders will watch for any signals from BOE officials that could clarify the central bank's reaction function to the latest data. With technical and fundamental factors both pointing lower, the risks appear skewed toward further GBP weakness in the near term.