British Pound awaits retail sales with November rate rise already priced in

• UK inflation reaches this year’s high of 3.5%, leaving GBP/USD little changed below 1.3400.
• A second BoE rate rise by December is now assigned roughly a 48% probability, down from 58%.
• Friday’s UK retail sales figures are expected to show a 0.1% decline following growth of 0.5%.

Wednesday’s UK inflation figures exceeded forecasts across the headline, core and monthly measures, yet sterling’s reaction was muted. Still trading just below 1.3400, GBP/USD has not closed a day above that level since 15 September. Before the figures were published, traders had almost fully priced in a Bank of England (BoE) rate rise on 5 November. The release therefore had scope only to alter how much of that increase remained to be priced in.

Stronger inflation lifts the probability of a rate rise by three points from 93%

September’s Consumer Price Index (CPI) inflation reached 3.5%, up from 3.1% and above the 3.4% forecast, while core inflation increased from 2.6% to 2.8%. The monthly price increase was 0.4%, compared with expectations of 0.3%. The biggest upward contribution came from transport: diesel was at its most expensive since July 2022, while the US-Iran war left Brent close to $109.00 a barrel. Meanwhile, producer output prices increased by 0.8% on the month, a tenth above forecasts, indicating that costs set to feed into shop prices over the coming months are continuing to rise.

Following the release, traders assigned roughly a 96% probability to the BoE raising the UK’s Bank Rate from 3.75% on 5 November, compared with about 93% beforehand. Sterling benefits from a rate rise as it is priced in, and this increase was already 93% reflected in market pricing. At the same time, the probability of another rise by December dropped from 58% to about 48%. Despite the stronger inflation figures, markets were therefore anticipating fewer UK rate increases this year rather than more.

Services inflation climbs in the first release since Governor Bailey described limited spillover

On 16 October, BoE Governor Bailey said there was little evidence so far that the energy shock was passing through to wages and other prices, a process economists describe as second-round effects. In Wednesday’s release, services inflation, the measure the BoE monitors most closely for such effects, increased from 3.4% to 3.7%. Recreation and culture price inflation also accelerated, from 1.6% to 2.3%.

It is a spillover into services that turns a single rate increase into a series, and the prospect of several rises is the element of the BoE outlook not yet reflected in sterling. With October’s inflation data due after the 5 November decision, Wednesday’s figures are the last inflation release available to the Monetary Policy Committee (MPC) before its vote.

Separately, the Office for National Statistics (ONS) reported September public sector net borrowing of £24.52 billion, as expenditure, including debt interest, outpaced income growth. That borrowing bill forms part of the backdrop to Chancellor Healey’s first Budget on 28 October. Having reached a 19-year high earlier in September, the 10-year gilt yield finished the month just below 5.4%. A Budget involving additional borrowing could therefore affect sterling through the bond market before the BoE’s vote.

Budget and Fed decisions coincide a week ahead of the BoE vote

Thursday’s GfK consumer confidence reading, due at 23:01 GMT, is expected to fall from -13 to -15. At 06:00 GMT on Friday, retail sales are forecast to register a monthly decline of 0.1%, following a 0.5% increase, while annual growth is expected to ease from 2.4% to 1%. Excluding fuel, sales are projected to rise by 1.5% year on year, outpacing the overall figure. The forecasts thus imply that Britons are buying less fuel than a year earlier as diesel prices stand at their highest since 2022.

S&P Global’s preliminary UK Purchasing Managers Index (PMI) readings, scheduled for 08:30 GMT on Friday, are expected to come in at 51.8 for both manufacturing and services. Their US counterparts, due at 13:45 GMT, are forecast at 55.6 and 57.9 respectively. At 14:00 GMT, University of Michigan sentiment is expected to remain unchanged at 46.3. With November’s rate rise already priced in, disappointing UK data would first weigh on the probability of a December increase.

The Budget will be presented by Chancellor Healey on 28 October, coinciding with the Fed’s decision. Prediction markets put the likelihood of rates being held at 3.75%-4.00% at close to 86%. When the BoE meets on 5 November, sterling will already reflect a November rise, while the prospect of a December move remains unresolved.

Sterling trades around its 200-day average

Resistance: Tuesday’s and Wednesday’s highs were capped at 1.3400, a level above which GBP/USD has not recorded a daily close since 15 September. The decline on 16 September began at 1.3500.

Support: Immediately beneath the price sits the 200-day Exponential Moving Average (EMA), just below 1.3400. Tuesday marked the pair’s first move above that average since mid-September. Further support lies at Wednesday’s low just above 1.3350, followed by 1.3300, the point where Monday’s decline halted.

Bias: A close below 1.3400 favours a short position targeting 1.3350, followed by 1.3300. After the advance from the 14 October low, the daily Stochastic Relative Strength Index (Stoch RSI) has entered overbought territory at around 85. A daily close above 1.3450 invalidates the short position.

Daily GBP/USD chart