Pound Slips as Traders Eye UK CPI and BoE Rate Outlook

Key Moments

GBP/USD Softens Ahead of Key UK Inflation Release

The British Pound is losing ground against the US Dollar in early Asian trading on Wednesday, with GBP/USD retreating toward 1.3375. The pullback comes as market participants await the release of the UK September Consumer Price Index (CPI) later in the day, a report widely seen as pivotal for the Bank of England’s upcoming policy decision.

Despite the modest decline in the currency pair, recent UK labor market figures are lending some support to Sterling and could help limit downside moves. A stronger-than-anticipated employment backdrop is reinforcing expectations that the Bank of England (BoE) will proceed with tightening at its next meeting.

Resilient Labor Market Underpins BoE Hike Expectations

Data from the Office for National Statistics (ONS) on Tuesday showed that the UK Unemployment Rate fell to 4.7 in the three months to August, compared with 4.9% in July. This marks the lowest level in more than a year, even as job vacancies continue to decline.

The focus now turns to September CPI inflation. The release is seen as critical for finalizing expectations around what would be the BoE’s first rate hike in more than three years in November. Economists anticipate headline CPI to increase 3.4% year-on-year in September, with core CPI projected to rise 2.7% year-on-year.

According to LSEG data cited in the article, markets are close to fully discounting a 25 basis points rate hike by the BoE at its November 5 policy meeting.

US Inflation and Fed Communication Keep Dollar in Play

On the US side, data published last week showed that CPI inflation accelerated in September. Even so, investors are still parsing the Federal Reserve’s likely response following comments from Fed Chair Kevin Warsh.

The Fed Chairman said that he does not “prejudge” interest-rate decisions, giving no preview of whether the central bank will hike or hold short-term rates steady at its upcoming October policy meeting.

Societe Generale: Labor and Pay Trends Support Further BoE Tightening

Analysts at Societe Generale highlight that the latest UK labor market and wage data are strengthening the case for additional BoE tightening. They state that “UK average earnings growth also picked up ever so fractionally in the private sector and will strengthen the hand of the MPC hawks at the BoE who back higher rates now to avoid having to deal with second round effects later.”

Some commentators have argued that the labor market is loosening, but Societe Generale emphasize that “the logic that the labour market is loosening has been driven by the fall in vacancies, down 5.1% yoy, but both real and nominal pay have been stable.” They argue that, in combination with energy market developments, the BoE has limited scope to pause tightening: “With oil prices climbing to the highest levels since May, there is little that will stop the BoE from raising rates in November to 4%.”

Feedback from the ONS Vacancy Survey indicates that “smaller firms may not be recruiting because of increases in labour cost,” underscoring wage-related pressures even as vacancies decline. On the market side, Societe Generale note that “GBP/G10 bid after surprise decrease in unemployment rate to 15-month low cements case for BoE November rate increase,” suggesting the macro backdrop and BoE outlook are starting to influence positioning. They add that “the run-up to the Autumn budget has in previous years typically been accompanied by investors liquidating GBP/G10 but the stronger macro backdrop and BoE outlook are giving the pound a slight edge over the dollar and the euro.”

Positioning data are also seen as a potential catalyst for a shift in sentiment. Societe Generale argue that “the price action suggest the accumulation of CFTC short positions has gone too far. The pound could be in demand on short covering and if bullish year-end seasonals re-establish themselves after the Budget next week.” They conclude that “UK CPI is published tomorrow,” highlighting that the inflation print could further influence expectations for the BoE’s November decision and the path of Sterling into year-end.

Greene Highlights Wage Risks, Reinforcing Hawkish BoE Tone

Greene’s remarks, assessed with a 7.4/10 score on the FXS Speechtracker and in line with the historic average, underscore concerns about stalled wage disinflation and heightened risks of second-round inflation effects, signaling a hawkish tilt. Forward-looking indicators pointing to pay growth closer to 3.5% and wage levels above those consistent with 2% inflation are cited as reasons for the BoE to act preemptively against persistent inflation.

Comments that the economy has displayed unexpected resilience and that labor market slack may have peaked further bolster this stance, implying that downside growth risks are not yet a binding constraint on policy. For the Pound, the combination of solid activity, tight labor conditions, and fears over second-round inflation effects argues against rapid easing and supports expectations for a firmer policy path than some market participants may have been pricing.

Technical Picture: Key Levels for GBP/USD

On the daily chart, GBP/USD is trading just above the upper Bollinger Band, pointing to the possibility of a short-term extension of the recent rebound. However, the pair remains capped by the 100-day simple moving average (SMA), which continues to maintain a broader bearish bias as long as it is not decisively reclaimed.

The Relative Strength Index (14) stands near 56, indicating improving momentum and suggesting that buyers are gaining some control. Even so, the close proximity of the 100-day SMA overhead signals that upside could remain constrained unless the pair achieves a clearer breakout.

On the downside, initial support is aligned with the upper Bollinger Band around 1.3365, followed by the middle Bollinger SMA near 1.3255 and the lower band around 1.3150, areas where demand could re-emerge on deeper declines. On the topside, immediate resistance is defined by the 100-day SMA at 1.3390. A daily close above this threshold would reduce the current bearish cap and potentially pave the way for a more durable recovery, while failure to clear it would leave GBP/USD vulnerable to renewed selling pressure back within the Bollinger range.