GBP/USD Drops on Sharp UK Inflation Decline

GBP/USD Analysis

The Bank of England pivoted in August with an 0.25% rate cut, but adopted a cautious stance towards further easing and stood pat last month, opting for a "gradual approach" ^[1]. However, Governor Bailey made a dovish shift with his Guardian interview last week, saying that policymakers could be "a bit more activist" ^[2] in lowering rates. Today's inflation report supports this stance, as CPI dropped sharply to 1.7% y/y, while core decelerated to 3.2% y/y. Such low figures have not been seen since 2021, strengthening the case for more aggressive easing by the BoE.

At the same time, inflation in the US is more persistent, with core CPI accelerating for the first time since March, despite the further moderation in the headline print. Furthermore, the latest employment report surprised to the upside, showing that the labor market remains strong. Various Fed officials including Chair Powell have offered a more cautious commentary following the jumbo 0.5% pivot.

GBP/USD climbs down from its 2024 peak and extends this month's decline after today's soft CPI report form the UK. The pair now tests the 38.2% Fibonacci which exposes it to a confluence of supports provide by the ascending trendline form this year's lows, the 50% Fibonacci and the 200Days EMA (blue line). A breach would bring 1.2612 in the spotlight, but that looks distant for now.

Despite the Fed's reticence, it has laid out a clear easing path ahead and there is a long road to neutral, while markets still price in another 50 bps of cuts this year. The BoE on the other hand expects inflation to pick up again this year and its monetary path murky. On the technical front, the aforementioned support cluster can contain the fall. This would give GBP/USD the opportunity to return above the EMA200 (black line), but we are cautious at this stage around bigger gains that would challenge the 2024 peak.