British Pound slides as US CPI lifts Fed rate-hike expectations
- GBP/USD drifts lower as stronger-than-expected US inflation data lift the US Dollar.
- Markets raise bets on an October Fed interest rate hike following CPI report.
- Traders turn their attention to UK growth and industrial production figures due on Thursday.
GBP/USD falls around 0.50% as stronger-than-expected US inflation data lift the US Dollar.GBP/USD loses around 0.52% on Wednesday as stronger-than-expected US inflation data reinforce expectations of further Federal Reserve (Fed) interest rate hikes, triggering fresh buying in the US Dollar (USD), while US Treasury yields also rebound sharply. At the time of writing, the pair trades around 1.3185, near its lowest level since June 2026.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, climbs to around 102.84, its highest level since April 2025. Meanwhile, the benchmark 10-year US Treasury yield rises more than 10 basis points (bps) to around 5.30%, after dipping below 5.20% earlier this week. Higher yields make Dollar-denominated assets more attractive, adding to the pressure on GBP/USD.
The September Consumer Price Index (CPI) rises 0.6% monthly, matching expectations and picking up from August’s 0.4% increase. Annual headline inflation climbs to 3.7% from 3.4%, exceeding the 3.6% forecast.
Core CPI, which excludes food and energy, increases 0.3% monthly, above the 0.2% expected and unchanged from August. The annual core rate rises to 2.6% from 2.4%, also beating the 2.5% forecast.
Following the data, traders price in a 43.7% chance of a rate hike at the Fed’s October 27-28 meeting, up from 22% before the release, while the probability of a December hike stands near 90%, according to the CME FedWatch Tool. Money markets also add to bets on three further rate increases by the end of 2027.
On the UK side, expectations of Bank of England (BoE) tightening offer limited support to the British Pound (GBP). The central bank has kept interest rates unchanged so far this year, but higher energy costs threaten to keep inflation above its 2% target, strengthening the case for a rate increase.
BoE Chief Economist Huw Pill said on Wednesday that “underlying UK inflation never fell enough pre-Iran shock,” while “UK output and labor market have proven more resilient.” However, he questioned the extent of tightening anticipated by traders, saying, “I am a bit more sceptical about market pricing of four rate hikes over the next year.” Attention now turns to UK August Gross Domestic Product (GDP), industrial production and manufacturing production figures, due on Thursday.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.