On Wednesday, UK inflation came in higher than expected across the board, including the headline, core, and monthly metrics, yet the Pound remained relatively stable. It hovers just below 1.3400 against the US dollar, having not closed above that level since mid-September. Traders had already factored in a near complete Bank of England (BoE) rate hike for November 5 ahead of the data release, meaning the inflation figures might only tweak the anticipated extent of that hike.
Hot inflation added three points to a hike priced at 93%
The Consumer Price Index (CPI) inflation jumped to 3.5% in September from 3.1%, exceeding the 3.4% forecast. The core inflation rate rose to 2.8%, up from 2.6%. Month-on-month prices increased by 0.4%, against a projected 0.3%. The main contributor to this rise was transport, with the price of diesel reaching levels not seen since July 2022, and Brent crude nearing $109 a barrel amid tensions from the US-Iran conflict. Additionally, producer output prices climbed 0.8% month-on-month, slightly outpacing estimates, indicating that costs for upcoming shop prices are still on the up.
Following this report, traders estimated the likelihood of the BoE raising the Bank Rate from 3.75% on November 5 at approximately 96%, an increase from around 93%. The Pound typically benefits from anticipated hikes, and this particular hike was already nearly fully priced in. However, the same data lowered the chances of a second hike by December to roughly 48% from 58%, suggesting that the hot inflation report has actually led the market to anticipate fewer hikes this year, not more.
Services inflation rose in the first report since Governor Bailey called the spillover limited
On October 16, BoE Governor Bailey indicated that he had not seen substantial evidence of energy price hikes influencing wages or other prices—what economists term second-round effects. In the latest report, services inflation, which the BoE closely monitors for these effects, increased to 3.7% from 3.4%. Prices for recreation and culture also rose, climbing to 2.3% from 1.6%.
How a spillover into services plays out can significantly impact the frequency of rate hikes, a factor that has yet to be reflected in the Pound’s pricing. Notably, inflation figures for October will be released after the November 5 decision, making Wednesday’s report the last one for the Monetary Policy Committee (MPC) prior to their vote.
The Office for National Statistics (ONS) reported public sector net borrowing at £24.52 billion for September, with expenditures— including debt interest—growing faster than revenue. This will factor into Chancellor Healey’s first Budget on October 28. By the end of September, the 10-year gilt yield sat just below 5.4% after hitting a 19-year high earlier that month. Thus, a Budget involving more borrowing could impact the Pound via the bond market before the BoE’s vote.
The Budget lands on Fed day, a week before the BoE votes
Consumer confidence, as measured by GfK, is anticipated at -15 after a previous figure of -13, with retail sales projected to dip by 0.1% for the month, following a 0.5% rise, and annual growth expected to slow to 1% from 2.4%. Sales excluding fuel are expected to rise by 1.5% year-on-year, suggesting Britons are purchasing less fuel this year, coinciding with the highest diesel prices seen since 2022.
On Friday at 08:30 GMT, S&P Global’s preliminary UK Purchasing Managers Index (PMI) figures are projected at 51.8 for both manufacturing and services. The US PMIs are expected at 55.6 and 57.9, respectively, while the University of Michigan sentiment index remains unchanged at 46.3. Should the UK figures underperform, the December rate hike probabilities would be affected first, as the November hike is already priced in.
Chancellor Healey will outline the Budget on October 28, coinciding with a Federal Reserve decision, where market expectations are near 86% for a hold between 3.75%-4.00%. The BoE’s meeting is set for November 5, with a rate hike already embedded in the Pound’s pricing while the December outlook is still uncertain.
The Pound’s levels around its 200-day average
Resistance at 1.3400 has limited highs on both Tuesday and Wednesday, and GBP/USD hasn’t posted a daily close above this point since September 15. The 1.3500 level marks the start of a drop on September 16.
Support is found just below 1.3400 at the 200-day Exponential Moving Average (EMA), with Tuesday being the first occurrence of trading above this benchmark since mid-September. The lowest point on Wednesday was slightly above 1.3350, with 1.3300 following, where Monday’s decline concluded.
The bias is short below 1.3400 on a closing basis, aiming for 1.3350 and then 1.3300. The daily Stochastic Relative Strength Index (Stoch RSI) has entered overbought territory, nearing 85 after a rise from the low on October 14. A daily close exceeding 1.3450 would end this short trend.
