Can the British Pound sustain gains above 1.3400 as hot CPI data strengthens BoE rate hike bets?

• GBP/USD edges higher to around 1.3405 as early Asian trading gets under way on Friday.
• A rise in borrowing costs is widely anticipated when the BoE next meets on November 5.
• A Reuters poll points to an October rate pause by the Fed, followed by another increase in December.

Modest buying interest lifts GBP/USD towards 1.3405 in Friday’s early Asian session, with the British Pound (GBP) strengthening slightly against the US Dollar (USD). Stronger UK Consumer Price Index (CPI) inflation in September has reinforced expectations that the Bank of England (BoE) will adopt a more hawkish stance. Investors now await the UK Retail Sales report, due later in the day.

A sharp rise in petrol and diesel prices pushed UK inflation to an 11-month high, according to figures released on Wednesday by the Office for National Statistics. September’s Consumer Price Index (CPI) increased 3.5% YoY, exceeding the 3.4% forecast and accelerating from 3.1% a month earlier. Core CPI inflation also beat the market consensus of 2.7%, rising to 2.8% YoY in September from 2.6% in August.

LSEG data show markets assigning a 98% probability to a 25 basis points (bps) increase in the BoE’s key interest rate next month, taking it to 4.0%. Such a move would mark the central bank’s first hike since 2023. Most traders are factoring in another increase of the same size at December’s meeting, the last of the year.

No clear indication of the timing of another interest rate increase came from Federal Reserve (Fed) Chair Kevin Warsh. Nearly all economists surveyed by Reuters expect the US central bank to leave rates unchanged at its forthcoming October policy meeting before raising them in December. Policymakers are signalling a patient approach, although persistent inflation makes the case for a firmer response.

Can BoE Tightening Expectations Keep Sterling Supported and EUR/GBP Under Pressure?

ING analysts see more than domestic political popularity behind the Pound’s recent strength in EUR/GBP. They observe 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.” While acknowledging that “earlier this summer, we had felt that sterling gains would not last,” the bank now argues 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.”

ING anticipates only a limited market response to fiscal developments ahead, saying that “next week's UK budget looks unlikely to derail the recent EUR/GBP break below 0.8400.” The bank believes the cross could remain under pressure, given that “the euro still having plenty of room to drop on French politics,” and concludes that “EUR/GBP can stay offered in a 0.8360-0,8430 range for the time being.”

Does Stalled Wage Disinflation Reinforce Greene’s Hawkish BoE Stance?

A score of 7.4/10 on the FXS Speechtracker puts Greene in line with the historical average, indicating an unchanged but distinctly hawkish position rather than a tougher tone. Her focus on wage disinflation having stalled at levels incompatible with 2% inflation, together with the view that policy should act proactively against second-round effects, strengthens the case for maintaining tight policy for longer. This also restrains the Pound’s near-term downside.

Despite forward-looking indicators suggesting pay growth closer to 3.5%, Greene’s warning that second-round risks are greater than previously believed indicates that she still considers the labour market too strong to permit safe policy easing. Her references to unexpected economic resilience and the possibility that labour market slack has peaked add to the hawkish reading. The implication is that rate cuts are likely to come later, potentially sustaining support for the Pound against the Euro and the Dollar.

Technical Analysis: Can GBP/USD Sustain Its Bullish Bias Above the 100-day SMA?

Holding above the 100-day simple moving average (SMA) and well clear of the Bollinger middle band, GBP/USD maintains a slightly bullish daily chart outlook. Its advance towards the upper Bollinger band points to a test of near-term upside levels. At 58.6, the Relative Strength Index (14) remains positive but has not reached overbought territory, suggesting further gains are possible before momentum becomes overstretched.

The upper Bollinger band at 1.3412 provides the first resistance level. A decisive daily close above it would pave the way for the recent recovery to extend. Initial support lies at the 100-day SMA of 1.3390, followed by the Bollinger middle band around 1.3275 and the lower band near 1.3140. These levels should limit corrective declines as long as the broader bullish bias remains intact.

(The technical analysis of this story was written with the help of an AI tool. Know more.)