Pound Rises on Hotter UK Inflation, but Sterling Bulls Face a Reality Check as Rate-Cut Bets Persist

Summary:

The Pound rose after UK inflation beat forecasts, but gains remain limited as investors expect price pressures to ease and the Bank of England to cut rates later this year, leaving GBP/USD stuck in consolidation near key technical levels.

Buy GBPUSD

End Time

CLOSED

1.34500

ENTRY

1.35800

TGT

1.33900

-- -- --

427

Points

Profit

1.33900

1.34927

CLOSING

1.34500

ENTRY

1.35800

TGT

The Pound Sterling traded broadly higher against most of its major peers during the European session on Thursday, buoyed by a stronger-than-expected UK inflation report that briefly revived hopes the Bank of England may be forced to keep interest rates restrictive for longer. Gains, however, remained uneven, with Sterling underperforming against the Australian and New Zealand dollars, reflecting broader risk dynamics and lingering doubts over the durability of UK price pressures.

Data released on Wednesday showed that the UK Consumer Price Index (CPI) accelerated to 3.4% year-on-year in December, exceeding market expectations of 3.3% and rising from November’s 3.2% reading. The upside surprise marked a setback for policymakers who have been seeking clearer evidence that inflation is on a sustained path back toward the BoE’s 2% target.

The inflation pickup was driven largely by services prices and lingering cost pressures across parts of the domestic economy, reinforcing concerns that inflation may be proving stickier than previously anticipated. In the immediate aftermath of the data, Sterling found modest support as traders pared back some near-term rate-cut expectations.

Yet, despite the headline beat, the broader market reaction has been notably restrained. Investors appear unconvinced that December’s inflation strength materially alters the medium-term outlook for UK monetary policy. Many economists argue the latest figures are backward-looking and fail to capture the powerful disinflationary forces expected to emerge in the coming months.

According to Reuters, much of last year’s inflation surge was driven by sharp increases in utility bills and other government-regulated prices, which are now set to drop out of the annual comparison. As these base effects unwind, headline inflation is expected to decelerate rapidly through the first half of the year, reducing pressure on the central bank.

This view is echoed by economists at the National Institute of Economic and Social Research (NIESR), who argued that the Bank of England “will not be worried by these numbers.” The think tank continues to project one interest rate cut in the first half of the year, reflecting confidence that inflation will cool without requiring prolonged policy restraint.

From a policy perspective, the BoE remains caught between persistently weak growth and inflation that is proving slow to fade. While policymakers have maintained a cautious tone, recent communications suggest the bar for keeping rates elevated is rising, particularly as economic momentum falters and household spending shows signs of strain.

Attention now shifts to a fresh batch of UK economic data due on Friday, which could either reinforce or undermine Sterling’s fragile recovery. Investors will closely watch December Retail Sales figures, a key gauge of consumer demand, which are expected to show a 0.1% month-on-month contraction. If confirmed, this would mark the third consecutive monthly decline, underscoring the pressure high interest rates and elevated living costs continue to place on UK households.

Also on the agenda is the preliminary S&P Global Purchasing Managers’ Index (PMI) for January, which will offer an early snapshot of business activity across the manufacturing and services sectors. Any signs of renewed contraction could reignite concerns over recession risks and strengthen the case for earlier monetary easing.

Technical Analysis

From a technical standpoint, GBP/USD is trading sideways near the 1.3430 level, reflecting the broader sense of uncertainty gripping the market. The pair’s recent advance has stalled, with price action consolidating rather than extending higher.

The 20-day Exponential Moving Average (EMA) has flattened after a steady climb, suggesting the short-term bullish momentum has faded and the pair is searching for direction. Meanwhile, the 14-day Relative Strength Index (RSI) hovers around 51, firmly in neutral territory, reinforcing the view that neither bulls nor bears currently have control.

Key Fibonacci retracement levels continue to define the near-term range. The 50% retracement of the move from the 1.3795 high to the 1.3012 low, located at 1.3404, is acting as immediate support. On the upside, the 61.8% retracement at 1.3496 remains a critical resistance barrier. A sustained break above this level would signal a renewed bullish push and potentially open the door toward the 1.36 handle.

TRADE RECOMMENDATION

BUY GBPUSD

ENTRY PRICE: 1.3450

STOP LOSS: 1.3390

TAKE PROFIT: 1.3580

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Warren Takunda

Analysts

Warren Takunda, a seasoned finance leader specializing in the Middle East, is a trusted senior analyst with a proven track record. As head of the finance team, he excels in financial planning, analysis, and reporting. Warren's expertise in financial modeling and investment analysis delivers valuable insights to clients.

Rank

Articless

2039

Win Rate

63.22%

P/L Ratio

0.72

Focus on

XAUUSD, GBPUSD, EURUSD

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