FX.co ★ Pound Weakens After Lower-than-Expected Inflation

The British pound experienced a significant decline, dropping to approximately $1.33 following the release of the UK's inflation data, which fell short of expectations. This development has strengthened speculation that the Bank of England will implement an interest rate reduction on Thursday. The annual inflation rate decreased to 3.2% in November, falling below both the anticipated 3.5% and the central bank’s prediction of 3.4%. Earlier in the week, labor market data revealed that the unemployment rate had risen to its highest point since 2021, while wage growth slowed, albeit not as dramatically as expected. Concurrently, GDP data published last week showed the UK economy contracting for the second consecutive month in October. In light of these economic conditions, it is widely anticipated that the Bank of England will recommence its monetary easing and lower the Bank Rate by 25 basis points (bps) to 3.75%. This would mark the lowest level since 2022, following pauses in rate changes in September and November. Currently, markets are anticipating approximately 66 basis points of rate cuts by 2026, compared to the previous estimate of 58 basis points prior to the release of the Consumer Price Index (CPI).