GBP/USD drops below 1.30 as UK CPI comes in very soft

GBP/USD is facing increased bearish pressure on Wednesday as the latest inflation data comes in softer than expected. UK consumer prices dropped to 1.7% in September, the lowest level in over three years. This is the first time it drops below the 2% target since April 2021 when the period of hyperinflation began taking CPI to above 11% back in late 2022. Analysts were anticipating the rate to drop from 2.2% to 1.9% but a lack of growth on the monthly figure (0% vs 0.1% expected) saw headline inflation drop further.

Core inflation, which has been an area of greater concern for central banks in recent months, also dropped more than anticipated. Year-on-year growth came in at 3.2%, the lowest in almost three years, down from 3.6% in August. Analysts had been expecting a milder drop to 3.4%. On the monthly reading, September saw core prices grow 0.1%, versus 0.3% anticipated and down from 0.4% in the previous month.

On the producer front, input and output prices continued to drop in September, alongside a smaller-than-expected rise in retail prices. The combination of these figures points to softening consumer demand in the UK, which is likely to increase the likelihood of further rate cuts.

As it stands, markets see a 92% chance of a 25 basis point cut from the Bank of England (BoE) in November. The odds have increased after the softer inflation print. There is also a 75% chance priced in that another rate cut comes in December. However, these odds can change quickly and something to keep in mind is that the falling inflation does not mean things are getting cheaper, only that prices are rising slower. Like what is happening in the US, we could see a pickup in inflationary pressures in the coming months, which could derail the expectations for further rate cuts. For now, it seems like the BoE has got the hang of keeping inflation low with higher rates, but external factors can always shake things up.

On the chart, GBP/USD has dropped below 1.30 for the first time since mid-August. The resurgence in the US dollar over the past few weeks has been the main cause behind the pullback in the pair from the highs above 1.34 at the end of September. However, the GBP side is now also weighing on the pair as the softer CPI data leads to a less favourable rate differential, especially now that US data has picked up again and markets are no longer so bearish on the dollar, nor do they believe the Federal Reserve is going to have to be so strict with its cutting cycle.

1.30 has acted like a psychological barrier in the past and we may see this happen again so it may take some time to successfully breach this area if the bears remain in control. For now, the momentum has already found a short-term low and has bounced back to 1.30 where support is starting to form.

GBP/USD daily chart

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