The UK inflation data put pressure on the British pound. The GBP/USD pair fell to the lower end of the 1.33 handle, briefly updating a weekly price low in response to the negative release. Nearly all components fell short of forecasts, pointing to softening price pressures. This outcome has increased market expectations that the Bank of England may cut interest rates by 25 basis points at its next meeting in November—or at the very least hint at such a move in December.
Specifically, the September headline Consumer Price Index (CPI) came in flat month-over-month, while analysts had expected a modest 0.1% increase. On a year-over-year basis, CPI remained at 3.8% for the third consecutive month, below the consensus forecast of 4.0%. The core CPI, which excludes volatile food and energy prices, slowed to 3.5% y/y versus a projected increase to 3.7%. Notably, core inflation has now declined for the second straight month, having stood at 3.8% in July.
Also in the red was the Retail Price Index (RPI), widely used in wage negotiations. On a monthly basis, the RPI slipped to -0.4%—its lowest level since September 2024 and the first negative reading since January this year. Year-over-year, it slowed to 4.5%, compared to a forecast of 4.7%. The indicator is also down for the second month in a row.
The Producer Price Input Index fell into negative territory as well, dropping to -0.1% m/m versus expectations for a 0.3% rise. Meanwhile, inflation in the service sector remained stable at 4.7% y/y—the same level as in August.
So, what does this report signal? On the one hand, the overall CPI remains significantly above the Bank of England's 2% target, and services inflation also persists. On the other hand, inflationary momentum is clearly slowing, particularly in the core and retail segments. This provides the Bank of England with room to ease monetary policy—though likely gradually and cautiously.
To interpret this release in context, it's essential to consider recently published UK labor market and GDP data. The unemployment rate unexpectedly jumped to 4.8%—its highest level since June 2021—while the number of jobless claims surged by nearly 26,000 (consensus expected +10,000). Additionally, the average wage growth excluding bonuses slowed to 4.7%, the weakest since spring 2022. In real terms (adjusted for inflation), wage growth was only 0.8%, reflecting falling real income.
UK GDP rose just 0.1% m/m following stagnation in the previous month, and grew 0.3% year-over-year.
The market remains divided over the BoE's next policy move. Analysts at Goldman Sachs expect a 25-point rate cut as early as November. In contrast, economists at HSBC and Deutsche Bank see a potential cut at the December meeting—or even early next year. There is a similar division within the Bank of England's own Monetary Policy Committee. MPC member Alan Taylor has already called on colleagues to "accelerate the easing process," warning of a rising risk of a hard landing for the UK economy. Meanwhile, Catherine Mann opposes a near-term rate cut, arguing that the labor market is weakening only gradually. Chief Economist Huw Pill has also voiced caution against a sharp lowering of rates, citing persistent inflation risks—though his remarks came before today's inflation data was released.
Although the inflation release increases the odds of a November rate cut, it is not a decisive trigger—despite its "red" tone. Accordingly, GBP/USD sellers quickly priced in much of the release. After testing the bottom of the 1.33 handle, they were unable to break the 1.3300 support level (Bollinger Bands lower line on the daily chart), allowing GBP/USD buyers to regain some control.
That said, the pair remains under pressure due to broader demand for the U.S. dollar. The greenback received additional support on headlines that President Donald Trump may meet with Chinese President Xi Jinping as early as next week in South Korea. The anticipation of a "major trade deal" continues to strengthen the dollar, weighing on GBP/USD.
Technical Outlook
On the daily chart, GBP/USD is trading between the middle and lower lines of the Bollinger Bands indicator, beneath the Kumo cloud and the Kijun-sen line, but above the Tenkan-sen line. Sellers have not yet managed to close below the Tenkan-sen level at 1.3360. Short positions would be more reasonable once bears break through and consolidate below that level, which would trigger a bearish "Parade of Lines" signal from the Ichimoku indicator.
Key support lies at 1.3300—the lower Bollinger Band on the daily chart and the primary downside target for the pair.
