Sterling Slides as Underlying Inflation Data Keeps BoE Cuts on the Table

The British Pound (GBP) underperformed major peers on Wednesday, falling against the US Dollar and Euro, presenting a counterintuitive reaction to hotter-than-expected headline inflation data.

While the Consumer Price Index (CPI) rose to 3.4% year-on-year in December, beating the 3.3% forecast, foreign exchange markets focused intently on the dovish details buried within the report.

The Devil in the Details

The currency's depreciation stems from the components of inflation that the Bank of England (BoE) watches most closely:

• Core CPI: Excluding volatile food and energy prices, core inflation held steady at 3.2%, coming in below the market expectation of 3.3%.
• Services Inflation: A critical gauge of domestic price pressures, services CPI ticked up marginally to 4.5% but fell short of the 4.6% forecast.

This “headline hot, core cold” dynamic suggests that while price pressures persist, the stickiest elements of inflation are not re-accelerating to a degree that would force the BoE to abandon its easing path.

Repricing Policy Expectations

Market pricing indicates that traders remain confident the BoE will proceed with rate cuts, with an 80% probability priced in for a cumulative 50 basis points of easing over the next year.

“The data confirms that the most persistent parts of the inflation basket are under control,” noted analysts. “This reinforces the view that the BoE can afford to cut rates to support the slowing economy, which naturally erodes the Pound's yield appeal.”

Technicals

• GBP/CAD dropped 0.22% to trade around 1.8540, while GBP/USD struggled to gain traction.

The currency now finds itself in a “sell-on-rallies” regime, capped by the divergence between the UK's economic stagnation and the relative resilience of the US economy. Markets turn next to the incoming Retail Sales and Flash PMI data, which will determine if the Pound's current support levels can hold.