Following the release of the UK inflation data, GBP/USD fell by around 0.6 percent. However, the implications of the data were actually not as bad as the market thought.

The Pound Sterling experienced a fairly sharp slump in European session trading on Wednesday (20/December), following the release of UK inflation data for November 2023. GBP/USD fell around 0.6% to 1.2650s. GBP/JPY slid nearly 1%, while EUR/GBP soared around 0.5% at the time of writing. However, the implications of the inflation data are not as bad as the market thinks.

gbpusd

The UK Office for National Statistics (ONS) reported that the Consumer Price Index (CPI) recorded -0.2% (month-over-month) in November 2023. Whereas, the previous consensus expected a +0.2% increase in inflation. The Core CPI posted an even sharper decline of -0.3% versus the estimate of +0.2%.

This unexpected fall in prices led the annual inflation rate to slump from 4.6% to 3.9% - the lowest level in more than two years. Core Inflation on an annualized basis also fell from 5.7% to 5.1%.

The ONS said that the drop in CPI was due to cheaper fuel prices, as well as a slower rise in food prices. The data does not prove that the prices of goods have fallen, but that they have risen much more slowly.

Sterling immediately plummeted as some traders thought the weaker inflation rate would prompt the Bank of England (BoE) to cut interest rates earlier. However, some analysts argue that the UK inflation data supports the BoE's intention to keep interest rates high. The reason is that despite a sharp decline in November, the general inflation rate is still far from the 2% target set by the central bank.

"Today's data will strengthen the BoE's argument that it is too early to consider cutting interest rates, especially with core inflation well above levels consistent with the inflation target," said Yael Selfin, chief economist at KPMG UK, as reported by Reuters.

UK Finance Minister, Jeremy Hunt, also welcomed the data release. He said, "With inflation more than halved, we are starting to remove inflationary pressures from the economy. We are back on a healthy and sustainable growth path."