November hike already priced in as British Pound awaits retail sales

• 3.5% UK inflation marks a high for the year. GBP/USD remains little changed below 1.3400.
• About 48% is now priced for a second BoE rate rise by December, down from 58%.
• A 0.1% decline is expected in Friday's UK retail sales release, following a 0.5% increase.

1.3400 remains just above GBP/USD. The pair has not closed a day above that level since 15 September, despite Wednesday's UK inflation release exceeding headline, core and monthly forecasts. Sterling's response was muted. Before the data, traders had almost fully discounted a Bank of England (BoE) rate rise on 5 November. The release could therefore only alter the remaining scope to price in that increase.

93% hike probability gains three points after inflation surprise

September's Consumer Price Index (CPI) inflation reached 3.5%, up from 3.1% and above the 3.4% forecast. Core inflation increased from 2.6% to 2.8%, while the monthly price rise of 0.4% exceeded expectations of 0.3%. The biggest upward contribution came from transport. Diesel prices were at their highest since July 2022, with Brent trading near $109.00 a barrel amid the US-Iran war. A monthly increase of 0.8% in producer output prices was a tenth above forecast. Costs set to feed into shop prices over the next few months are therefore continuing to rise.

Following the release, markets assigned about a 96% probability to the BoE increasing the UK's Bank Rate from 3.75% on 5 November, compared with about 93% beforehand. Sterling benefits when a rate rise is priced in, but 93% of this move was already discounted. Meanwhile, the probability of a second increase by December dropped from 58% to about 48%. Rather than lifting expectations for UK rate rises this year, the stronger inflation figures left markets anticipating fewer.

3.7% services inflation follows Bailey's limited-spillover assessment

On 16 October, BoE Governor Bailey said there was still little evidence that the energy shock was spreading to pay and other prices, the process economists describe as second-round effects. Wednesday's figures showed services inflation rising from 3.4% to 3.7%. This is the measure the BoE monitors most closely for such effects. Inflation in recreation and culture prices also accelerated, from 1.6% to 2.3%.

Multiple rate rises, rather than a single increase, become necessary when the shock spreads into services. That prospect of several rises is the element of the BoE outlook that sterling has yet to price in. With October's inflation data due after the 5 November decision, Wednesday's release is the final inflation report available to the Monetary Policy Committee (MPC) before its vote.

September public sector net borrowing totalled £24.52 billion, according to the Office for National Statistics (ONS). Spending, including debt interest, grew more quickly than income. Chancellor Healey's first Budget on 28 October will have to account for that bill. After reaching 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 therefore affect sterling through the bond market ahead of the BoE decision.

28 October Budget coincides with Fed decision, a week before BoE vote

Thursday's GfK consumer confidence reading, due at 23:01 GMT, is expected to slip from -13 to -15. At 06:00 GMT on Friday, retail sales are forecast to show a monthly fall of 0.1%, following a 0.5% gain. Annual growth is expected to ease from 2.4% to 1%. Excluding fuel, sales are projected to rise 1.5% year on year, outpacing the total. Those forecasts imply Britons are buying less fuel than a year earlier, with diesel prices at their highest since 2022.

S&P Global's preliminary UK Purchasing Managers Index (PMI) releases, due on Friday at 08:30 GMT, are expected to show readings of 51.8 for both manufacturing and services. Forecasts for the corresponding US figures at 13:45 GMT stand at 55.6 and 57.9. At 14:00 GMT, University of Michigan sentiment is expected to remain at 46.3. Since the November rate rise is already discounted, weak UK releases would first weigh on the probability of a December increase.

The Fed's decision and Chancellor Healey's Budget presentation both fall on 28 October. Prediction markets put the probability of the Fed holding at 3.75%-4.00% near 86%. The BoE then decides on 5 November. Sterling already reflects a November rate rise, while the December outcome remains uncertain.

200-day average anchors sterling's key levels

Resistance: Tuesday's and Wednesday's advances were capped at 1.3400. GBP/USD has recorded no daily close above that mark since 15 September. The next level, 1.3500, marks the starting point of the 16 September decline.

Support: Immediately below the price sits the 200-day Exponential Moving Average (EMA), itself just under 1.3400. Tuesday marked the pair's first trade above the average since mid-September. Below that, Wednesday's low just over 1.3350 is the next reference, followed by 1.3300, where Monday's pullback bottomed.

Bias: A closing level below 1.3400 favours a short position targeting 1.3350, followed by 1.3300. Following the recovery from the 14 October low, the daily Stochastic Relative Strength Index (Stoch RSI) has entered overbought territory near 85. A daily close over 1.3450 invalidates the short position.

GBP/USD: daily price chart