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The British pound weakened on Wednesday, falling against both the U.S. dollar and the euro, after official data showed that U.K. inflation unexpectedly held steady in September, rather than rising as markets had anticipated.
The Consumer Price Index (CPI) remained at 3.8% for the third consecutive month, according to the Office for National Statistics (ONS) — below the 4.0% increase expected by analysts and the Bank of England (BoE).
Sterling Drops on Softer Inflation Outlook
Following the data, the pound fell 0.4% to $1.3323, marking its biggest single-day loss in nearly two weeks, as traders ramped up expectations for BoE rate cuts later this year.
Against the euro, sterling also slipped 0.4% to 87.05 pence, as currency markets priced in a more dovish policy path from the central bank.
The core inflation measure—excluding volatile food and energy components—also came in weaker than forecasts, while services inflation undershot projections as well.
These signs of cooling price pressures bolstered expectations that the Monetary Policy Committee (MPC) could lower the Bank Rate sooner than previously anticipated.
According to interest rate futures, traders now see a 75% probability that the BoE will cut rates to 3.75% by December, up sharply from about 46% before the inflation report.
Fiscal Concerns Keep Pressure on Sterling
Despite the softer inflation data, investor sentiment toward sterling remains cautious ahead of the autumn budget scheduled for next month.
Markets are bracing for possible tax hikes and spending cuts, as Finance Minister Rachel Reeves faces growing fiscal constraints.
Figures released on Tuesday showed that government borrowing in the first half of the fiscal year reached its highest level on record outside the pandemic, intensifying pressure on Reeves to close a £40 billion shortfall while maintaining her fiscal credibility.
Market Outlook
The combination of easing inflation, mounting fiscal concerns, and renewed BoE dovish expectations has left the pound vulnerable to further declines.
Analysts suggest that if Friday’s U.K. retail sales and upcoming U.S. CPI data reinforce a widening policy divergence between the BoE and the Federal Reserve, sterling could test lower support levels near $1.3250 in the short term.
