Pound Holds Firm Above 1.3400 On Hot UK Inflation Data

Key Moments

GBP/USD Supported by Stronger UK Inflation and BoE Expectations

The GBP/USD pair was modestly firmer near 1.3405 in early Asian trade on Friday, with the Pound edging higher against the Dollar after a hotter UK September Consumer Price Index (CPI) reading boosted expectations for a more aggressive policy stance from the Bank of England (BoE). Investors are also awaiting the UK Retail Sales release later in the session.

Data from the Office for National Statistics on Wednesday showed UK inflation at an 11-month high, driven in large part by higher petrol and diesel prices. Headline CPI rose 3.5% year-on-year in September, up from 3.1% previously and above forecasts of 3.4%. Core CPI inflation also gained momentum, rising to 2.8% year-on-year from 2.6% in August, beating the 2.7% market consensus.

Rate Path: BoE Seen Hiking Twice, Fed Expected to Pause, Then Move

Interest rate markets are almost fully aligned with a BoE rate increase at the next policy meeting on November 5. According to LSEG data, pricing currently reflects a 98% probability that the central bank lifts its key rate by 25 basis points to 4.0% next month. This would represent the BoE’s first rate hike since 2023. Positioning also suggests that traders broadly anticipate another 25 basis point increase at the BoE’s final meeting of the year in December.

On the U.S. side, Federal Reserve (Fed) Chair Kevin Warsh did not provide explicit guidance on the timing of any further rate rises. A Reuters poll indicated that the Fed is widely expected to keep rates unchanged at its upcoming October gathering, with nearly all surveyed economists projecting that the next move will come in December. The survey highlighted that policymakers are signaling patience, even as persistent inflation continues to justify a firmer policy stance.

Sterling Dynamics Versus the Euro: ING Sees Independent GBP Strength

Analysts at ING argue that the Pound’s performance in EUR/GBP reflects more than just domestic political factors. They note that “it seems like sterling is riding on the coat-tails of PM Andy Burnham’s popularity. In reality, it looks like there is both independent sterling strength and independent euro weakness at play in EUR/GBP.”

ING acknowledges that “earlier this summer, we had felt that sterling gains would not last,” but adds that “greater market confidence in a Bank of England tightening cycle – we look for 25bp hikes in February and November – makes sterling a high-carry European currency.”

Looking ahead, the bank expects only limited market reaction to upcoming fiscal news, remarking that “next week’s UK budget looks unlikely to derail the recent EUR/GBP break below 0.8400.” With “the euro still having plenty of room to drop on French politics,” ING sees potential for the cross to remain under pressure, concluding that “EUR/GBP can stay offered in a 0.8360-0,8430 range for the time being.”

Greene’s Comments Reinforce a Hawkish BoE Bias

Greene’s 7.4/10 FXS Speechtracker score is in line with the historic average, pointing to a consistently hawkish, but not intensifying, tone. The focus on stalled wage disinflation at levels seen as incompatible with 2% inflation, alongside the view that policy should move proactively to counter second-round effects, underpins a preference for keeping policy restrictive for longer. This stance limits near-term downside for the Pound.

Greene’s observation that the risk of second-round effects is now viewed as greater than previously, even as forward-looking indicators signal pay growth moving closer to 3.5%, suggests that the labor market is still judged too tight to justify easing. References to stronger-than-expected economic resilience and signs that labor market slack may have already peaked further support a hawkish reading. This combination points to a delayed timeline for eventual rate cuts and implies that the Pound may remain relatively well-supported against both the Euro and the Dollar.

Technical Picture: GBP/USD Maintains Bullish Structure Above 100-Day SMA

From a technical perspective, GBP/USD retains a slightly bullish profile on the daily chart, with spot trading above the 100-day simple moving average (SMA) and well above the middle line of the Bollinger Bands. The pair is inching toward the upper Bollinger band, indicating a possible test of near-term resistance, while the 14-day Relative Strength Index (RSI) stands at 58.6, comfortably in positive territory and below overbought thresholds. This configuration suggests that there is still scope for further upside before momentum becomes overstretched.

On the topside, resistance is initially defined by the upper Bollinger band at 1.3412. A decisive daily close above this area would likely validate further gains and continuation of the current recovery phase. On the downside, the 100-day SMA at 1.3390 provides the first line of support, followed by additional buffers around the Bollinger middle band near 1.3275 and the lower band around 1.3140. These levels are expected to help contain dips while the broader bullish tone remains in place.