Hot CPI bolsters BoE rate hike expectations as British Pound maintains gains above 1.3400

• Early Asian trading on Friday sees GBP/USD edge higher to around 1.3405.
• A rise in borrowing costs is widely anticipated at the BoE’s next meeting on 5 November.
• A Reuters poll points to an October hold from the Fed, followed by another rate rise in December.

Stronger-than-expected UK Consumer Price Index (CPI) figures for September have reinforced expectations of a more hawkish Bank of England (BoE), helping the British Pound (GBP) advance slightly against the US Dollar (USD). GBP/USD is trading modestly higher near 1.3405 in Friday’s early Asian session, with the UK Retail Sales report due later in the day.

A jump in petrol and diesel prices pushed UK inflation to an 11-month high, figures released by the Office for National Statistics on Wednesday showed. September’s Consumer Price Index (CPI) rose 3.5% year on year, exceeding the 3.4% forecast and accelerating from 3.1% the month before. Core CPI inflation also surpassed the market consensus of 2.7%, reaching 2.8% year on year in September after 2.6% in August.

According to LSEG data, markets assign a 98% chance to a 25 basis point (bps) increase in the BoE’s key interest rate to 4.0% next month. Such a move would mark the bank’s first rate rise since 2023. A majority of traders also price in another increase of the same magnitude at December’s meeting, the central bank’s last of the year.

No clear indication of the timing of another interest rate rise came from Federal Reserve (Fed) Chair Kevin Warsh. Nearly all economists surveyed by Reuters expect the US central bank to leave rates unchanged at its forthcoming October policy meeting before raising them in December. Policymakers continue to signal patience, despite persistent inflation making the case for a firmer response.

BoE tightening bets underpin Sterling while EUR/GBP remains under pressure

ING analysts see more than domestic political popularity behind the Pound’s recent gains against the Euro. They observe that “it seems like sterling is riding on the coat-tails of PM Andy Burnham's popularity. In reality, it looks like there is both independent sterling strength and independent euro weakness at play in EUR/GBP.” Although the bank concedes that “earlier this summer, we had felt that sterling gains would not last,” it now argues that “greater market confidence in a Bank of England tightening cycle – we look for 25bp hikes in February and November – makes sterling a high-carry European currency.”

ING anticipates only a limited market response to fiscal developments, saying that “next week's UK budget looks unlikely to derail the recent EUR/GBP break below 0.8400.” The bank believes the cross could continue to face pressure, given “the euro still having plenty of room to drop on French politics,” and concludes that “EUR/GBP can stay offered in a 0.8360-0,8430 range for the time being.”

Greene’s wage inflation concerns maintain the BoE’s hawkish tilt

At 7.4/10, Greene’s FXS Speechtracker score is in line with its historical average, indicating a consistently hawkish position rather than a further hardening of her tone. Her focus on wage disinflation having stalled at levels incompatible with 2% inflation, together with her view that policy should act proactively against second-round effects, strengthens the case for maintaining restrictive policy for longer. That stance limits the Pound’s near-term downside.

Although forward-looking indicators suggest pay growth is nearer 3.5%, Greene’s warning that second-round risks are greater than previously assessed suggests she still regards the labour market as too strong for policy to be eased safely. Her references to unexpectedly resilient economic activity and the possibility that labour market slack has peaked add weight to this hawkish reading. The implication is that rate cuts are likely to come later, potentially keeping the Pound supported against both the Euro and the Dollar.

Technical Analysis: GBP/USD maintains a bullish bias above the 100-day SMA

Holding above its 100-day simple moving average (SMA) and well clear of the middle Bollinger band, GBP/USD continues to show a modest bullish bias on the daily chart. The pair is approaching the upper Bollinger band, pointing to a test of near-term upside levels. Meanwhile, the Relative Strength Index (14) stands at 58.6, a positive reading that does not yet indicate overbought conditions. This leaves scope for additional gains before momentum becomes stretched.

The upper Bollinger band at 1.3412 provides the first resistance level; a decisive daily close above it would pave the way for the recent recovery to extend. Initial support lies at the 100-day SMA of 1.3390. Below that, the middle Bollinger band around 1.3275 and the lower band near 1.3140 offer further support, which should limit corrective declines as long as the broader bullish bias holds.

(The technical analysis of this story was written with the help of an AI tool. Know more.)