The GBP/USD pair hit a weekly high on Wednesday but failed to hold within the 1.27 range. The UK inflation report provided only temporary support to the pound, although almost all components of the release were in the green zone. But the dollar again turned out to be stronger—after a temporary surge to the 1.2713 mark, it later retreated to the 1.26 range.
Notably, GBP/USD traders have ignored favorable fundamentals for the pound for two consecutive days. On Tuesday, Bank of England officials voiced concerns about inflation risks, and Wednesday's report further highlighted inflationary pressures in October, as if confirming the voiced concerns. However, the pair struggled to capitalize on these factors, although it tested the 27th figure.
Let's start with the inflation report. First, the inflation data surprised markets with stronger-than-expected headline numbers. For example, the monthly Consumer Price Index rose to 0.6% (forecast: 0.4%), marking the highest growth rate since March. Annual CPI increased to 2.3% (forecast: 2.2%). The indicator was in the green zone, exceeding the BoE's target range and hitting a multi-month high (October saw the strongest growth rate since April this year).
The Core CPI, excluding food and energy prices, also supported the pound, climbing to 3.3% YoY (forecast: 3.1%).
The Retail Price Index (RPI), used in wage negotiations, matched forecasts but still demonstrated an upward trend. In monthly terms, the RPI returned to positive territory at 0.5%. In annual terms, the index rose to 3.4% in October after falling to 2.7% in September.
The monthly producer purchase price index left the negative zone for the first time since April this year, rising to 0.1%. In annual terms, the indicator came in at -2.3% y/y (with a forecast of a decline to -3.0%).
The producer selling price index also ended up in the green zone: 0.0% m/m (with a forecast of -0.1%), -0.8% y/y (with a forecast of -1.0%).
The data confirms that the BoE will likely maintain its current monetary policy stance at its next meeting. Recent speeches by BoE Governor Andrew Bailey and other committee members (Claire Lombardelli, Catherine Mann, Alan Taylor) were moderately hawkish, emphasizing concerns about inflation risks without signaling imminent rate hikes. The latest inflation data reinforces the likelihood of a December pause in rate cuts as the BoE monitors inflation sustainability.
The October report on inflation growth in the UK should be viewed through the prism of these speeches: there is no doubt that if the release had been made public the day before the parliamentary hearings, the rhetoric of the BoE's management would have been more rigid. However, it is easy to put 2 + 2 together here, concluding that the central bank will pause in reducing the interest rate in December.
Why do GBP/USD traders react so calmly to such a unipolar information flow? In my opinion, there are several reasons.
Let's start with the fact that a probable pause at the December meeting of the BoE is not a sensation. This has been discussed for a long time. Cautious assumptions have given way to confident forecasts, especially after Donald Trump's victory and following the results of the November meeting of the English central bank. Let me remind you that Andrew Bailey made it clear at the final press conference that the BoE may take a wait-and-see position at the next meeting. According to him, the central bank needs to ensure that inflation remains close to the target level on a sustainable basis, "so the pace of easing should not be too fast or too sharp." The latest inflation report only confirmed the assumptions of many analysts.
The dollar remains a significant anchor for GBP/USD, which is still in high demand. After a three-day decline, the US Dollar Index (DXY) rebounded to 106.65, supported by risk-off sentiment and increased confidence that the Fed will hold rates steady in December. According to the CME FedWatch Tool, the probability of no rate cut in December has risen to 45%, up from just 10-15% last week, following Powell's hawkish remarks in Dallas, where he said that the central bank should not rush to lower the interest rate). Such a significant decline in dovish sentiment supports the American currency.
The UK inflation report provided only a brief boost for the pound, which surged to 1.2713 before retreating. The pound closely mirrors the dollar's movements and is unlikely to establish a solid independent trend soon. Corrective spikes should be viewed without significant catalysts as opportunities to open short positions. The nearest (and so far the main) target of the downward movement is the 1.2600 mark, aligning with the lower Bollinger Bands line on the H4 chart.
