British Pound heads towards retail sales release with November rate hike already factored in

• GBP/USD remains little changed below 1.3400 despite UK inflation climbing to this year's high of 3.5%.
• Markets now assign about a 48% probability to a second BoE hike by December, down from 58%.
• Friday's UK retail sales data are expected to show a 0.1% decline, following a 0.5% increase.

Sterling showed little reaction to Wednesday's UK inflation figures, even as the headline, core and monthly readings all exceeded forecasts. GBP/USD remains marginally below 1.3400, a level it has not closed above on a daily basis since September 15. With traders having almost fully factored in a Bank of England (BoE) rate increase on November 5 ahead of the data, the release could only influence the small portion of that hike still available to price in.

Why did hotter inflation add only three points to a hike already priced at 93%?

September's Consumer Price Index (CPI) inflation reached 3.5%, up from 3.1% and above the 3.4% forecast, while core inflation increased from 2.6% to 2.8%. On a monthly basis, prices advanced 0.4%, exceeding the 0.3% estimate. The biggest upward contribution came from transport: diesel was at its most expensive since July 2022, while the US-Iran war kept Brent near $109.00 a barrel. Producer output prices also increased 0.8% month on month, a tenth above expectations, indicating that costs set to feed into shop prices over the coming months continue to rise.

Following the release, traders assigned about a 96% probability to the BoE raising the UK's Bank Rate from 3.75% on November 5, compared with about 93% beforehand. Rate increases support the Pound when markets price them in, and 93% of this hike had already been accounted for. Meanwhile, the probability of a second increase by December dropped from 58% to about 48% after the same data. Despite the hotter inflation reading, markets therefore anticipated fewer UK rate increases this year rather than more.

Does rising services inflation challenge Governor Bailey's view of limited spillover?

In remarks on October 16, BoE Governor Bailey said there was little evidence so far that the energy shock was spreading to wages and other prices, a process economists describe as second-round effects. Wednesday brought the first inflation report since those remarks. Services inflation, the BoE's most closely watched measure of such effects, increased from 3.4% to 3.7%, while inflation in recreation and culture prices accelerated from 1.6% to 2.3%.

If the shock spreads into services, a single rate increase can become a series of hikes. It is that prospect of several increases which Sterling has yet to price in. Since October's inflation data will be published only after the November 5 decision, Wednesday's figures are the last inflation report available to the Monetary Policy Committee (MPC) before its vote.

Separately, the Office for National Statistics (ONS) reported September public sector net borrowing of £24.52 billion, as expenditure, including debt interest, outpaced income growth. That borrowing bill feeds into Chancellor Healey's first Budget on October 28. After touching a 19-year high earlier in September, the 10-year gilt yield finished the month just under 5.4%. A Budget involving additional borrowing could consequently affect Sterling through the bond market before the BoE's vote.

What could the Budget and Fed decision mean a week before the BoE vote?

Thursday's GfK consumer confidence release, due at 23:01 GMT, is expected to show a reading of -15, against -13 previously. At 06:00 GMT on Friday, retail sales are projected to decline 0.1% month on month following a 0.5% increase, while annual growth is expected to ease from 2.4% to 1%. Sales excluding fuel are forecast to rise 1.5% year on year, outpacing overall sales growth. These forecasts therefore imply that Britons are purchasing less fuel than a year earlier, with diesel prices at their highest since 2022.

Friday's preliminary UK Purchasing Managers Index (PMI) readings from S&P Global, scheduled for 08:30 GMT, are expected at 51.8 for manufacturing and services alike. The equivalent US readings, due at 13:45 GMT, are forecast at 55.6 and 57.9 respectively. At 14:00 GMT, University of Michigan sentiment is expected to remain unchanged at 46.3. With November's hike already priced in, any weakness across the UK releases would first weigh on the probability of a December increase.

October 28 brings both Chancellor Healey's Budget and the Fed's decision, with prediction markets assigning close to an 86% probability to rates being held at 3.75%-4.00%. The BoE decision follows on November 5. Sterling already reflects a November hike, but the prospect of a December increase remains unresolved.

Which Pound levels matter around the 200-day average?

Resistance: GBP/USD's advances stalled at 1.3400 on both Tuesday and Wednesday, with no daily close above that level since September 15. The next level, 1.3500, marks the starting point of the September 16 decline.

Support: Immediately beneath the current price lies the 200-day Exponential Moving Average (EMA), marginally below 1.3400. Tuesday marked the pair's first move above this average since mid-September. Further support comes at Wednesday's low, just above 1.3350, followed by 1.3300, where Monday's decline found a floor.

Bias: The short view remains in place on a closing basis below 1.3400, targeting 1.3350 first and 1.3300 thereafter. Following the rise from the October 14 low, the daily Stochastic Relative Strength Index (Stoch RSI) has entered overbought territory near 85. A daily close above 1.3450 invalidates the short position.

Daily chart: GBP/USD