GBP/USD fell below 1.3400 following the UK’s inflation report, which was weaker than anticipated, ahead of the Bank of England’s policy decision. At the time of the report, GBP/USD was trading at around 1.3350, dropping by 0.48%.
UK Consumer Price Index in November fell from 0.4% month-on-month to -0.2%, missing the forecast of 0%. Annually, it decreased from 3.6% to 3.2%, against expectations of a fall to 3.5%. This data led the market to fully price in a 25-basis-point BoE rate cut to 3.75% for Thursday.
US Economic Outlook
The US economic outlook is centred on its upcoming CPI and jobless claims data. Estimates suggest 225,000 Americans will file for unemployment benefits. Technical analysis shows GBP/USD had an upward-to-neutral bias but slightly bearish momentum, with the Relative Strength Index indicating potential further upside.
The table shows that the British Pound was the strongest against the Australian Dollar this week. Percentage changes against other major currencies were also noted. The currency heat map example demonstrates GBP as the base and USD as the quote, reflecting specific percentage changes.
The sharp drop in UK inflation to 3.2% is the main story, coming in well below the 3.5% we were all looking for. This effectively locks in the Bank of England rate cut for tomorrow. Markets, looking at overnight index swaps, are now fully pricing in a 25-basis-point cut to 3.75%, leaving little room for a hawkish surprise.
Meanwhile, the US Federal Reserve appears to be in no hurry to cut rates, a stark contrast to the BoE’s position. Looking at the CME’s FedWatch Tool, we see the market is only pricing a slim 15% chance of a Fed cut in the first quarter of 2026. All eyes are now on tomorrow’s US CPI and jobless claims data to confirm this policy divergence.
Market Sentiment and Technical Analysis
Given this outlook, we should anticipate continued downward pressure on the GBP/USD pair. The options market is already reflecting this, with one-month risk reversals for GBP/USD falling to -0.45, indicating traders are actively paying more to protect against a further slide in the pound. This is the most bearish options sentiment we’ve seen since the third quarter.
A break below the 200-day moving average around 1.3345 seems likely, which would open the door to the 1.3300 level. We should consider buying puts or establishing bear put spreads targeting this area over the next few weeks. The key will be to watch if the pair can hold below the 1.3400 mark after the BoE announcement.
This setup is reminiscent of the dynamic we saw back in 2023 when aggressive Fed tightening created significant dollar strength against other major currencies. The growing policy gap between a dovish BoE and a patient Fed could fuel a similar trend into early 2026. We are positioning for a stronger dollar against a weakening sterling.
