The Pound Sterling (GBP) edged lower against the US Dollar (USD) on Wednesday, ahead of the Federal Reserve’s policy meeting, which could signal a shift towards a less aggressive monetary easing path in the United States.
Meanwhile, UK inflation data matched market expectations, with consumer prices rising 2.6% year-on-year in November, while services inflation remained steady at 5.0%.
Money market expectations for the Bank of England’s (BoE) interest rate trajectory remained relatively stable. Investors priced in 57 basis points (bps) of monetary easing by the end of 2025, a slight increase from the 55 bps projected before the inflation data release.
UK bond yields were softer, with two-year gilt yields falling 3 bps to 4.41%, while 10-year gilt yields held at 4.51%, close to October 2008’s peak of 4.594%.
“Today’s inflation figures reinforce the Monetary Policy Committee’s (MPC) stance of patience and gradualism,” said Sanjay Raja, Chief UK Economist at Deutsche Bank. He cautioned that the MPC is still far from declaring victory on inflation.
Raja also highlighted potential upward price pressures, as employers might increase prices early next year to account for higher National Insurance Contributions (NIC).
The pound weakened against the euro, with the euro gaining 0.23% to reach 82.70 pence. Last week, the euro touched 82.51 pence, its strongest level since March 2022. Analysts believe the pound is likely to remain resilient due to a significant yield divergence between the UK and the eurozone.
While markets expect the BoE to cut rates by around 55 bps in 2025, the European Central Bank (ECB) deposit rate is projected to decline to 1.8% by December 2025, from its current level of 3%.
Recent data showing accelerated UK wage growth, driven by the private sector, adds to the hawkish argument within the MPC. Analysts note that wage trends in the private sector closely mirror broader economic conditions.
Sterling slipped 0.2% against the US Dollar, trading at $1.2684.
“The BoE policy outlook is complicated by weaker evidence that the NIC hike will have a significant inflationary impact,” said Shaan Raithatha, Senior Economist at Vanguard.
He pointed out that British companies are grappling with £1.1 billion in additional labour costs, stemming from higher social security contributions and minimum wage increases outlined in Finance Minister Rachel Reeves’ October budget.
With the Fed’s decision looming, markets remain focused on both transatlantic economic divergences and domestic pressures shaping the BoE’s policy path.
