Pound Slides as Softer UK Inflation Data Boosts Rate Cut Expectations

Key Moments

Inflation Surprise Eases Pressure on the BoE

The latest UK inflation release came in below market expectations, with consumer price growth easing more than anticipated across key measures. According to the Office for National Statistics (ONS), UK CPI year-over-year was reported at 3.2% compared with a forecast of 3.5%. Core CPI year-over-year also registered at 3.2%, versus expectations of 3.4%.

The ONS highlighted that food and non-alcoholic beverages, along with alcohol and tobacco, delivered the largest downward contributions to the monthly movement in both the CPIH and CPI annual rates. These categories helped pull overall inflation lower.

Recent commentary from several Bank of England (BoE) policymakers had emphasized worries that ongoing increases in food prices could keep inflation stuck above the 2% target by reshaping household expectations. The latest moderation in food-related price pressures therefore presents a positive development for the central bank as it approaches its upcoming monetary policy decision.

The BoE is expected to cut the Bank Rate to 3.75% tomorrow. Given the softer inflation profile, the data offers additional support for a more accommodative stance.

Market Reaction: Pound Sells Off, FTSE 100 Rallies

Financial markets reacted swiftly and decisively to the downside inflation surprise. The British pound dropped broadly as traders increased their expectations for BoE easing. At the same time, the UK FTSE 100 index advanced sharply, benefiting from the more dovish interest rate outlook.

The combination of weak employment data and softer inflation figures this week has reinforced the view that the BoE might not only implement the widely anticipated 25-basis-point cut but could also signal a more dovish policy path. While the market had previously been pricing in at least one additional rate reduction in 2026, positioning is now shifting toward the possibility of at least two more cuts next year.

Implications for FX and Equities

The recalibration of rate expectations is likely to remain a headwind for the pound. The currency may be particularly vulnerable against the euro, where some positioning still reflects relatively more hawkish sentiment toward the European Central Bank.

In contrast, the FTSE 100 stands to gain from the prospect of lower borrowing costs and an anticipated recovery in economic activity. These dynamics are generally supportive for equities and could help propel the index toward fresh all-time highs.

Key Data Snapshot