British Pound holds gains above 1.3400 as hot CPI data fuels BoE rate hike bets

The GBP/USD pair posts modest gains near 1.3405 during the early Asian session on Friday. The British Pound (GBP) edges higher against the US Dollar (USD) as hotter UK September Consumer Price Index (CPI) data has bolstered expectations of a more hawkish stance from the Bank of England (BoE). The UK Retail Sales report will be published later in the day.

UK inflation reaches an 11-month high after a surge in petrol and diesel costs, the Office for National Statistics revealed on Wednesday. The Consumer Price Index (CPI) climbed 3.5% YoY in September, compared to 3.1% in the previous month, hotter than expectations of 3.4%. Meanwhile, the core CPI inflation rose to 2.8% YoY in September, up from 2.6% in August, above the market consensus of 2.7%.

Markets are pricing in a 98% probability that the BoE raises its key interest rate by 25 basis points (bps) to 4.0% next month, according to LSEG data. This would be its first hike since 2023. The majority of traders are also pricing in a further hike of the same size at the central bank’s final meeting of the year in December.

Federal Reserve (Fed) Chair Kevin Warsh refused to give any clear hint about how soon another interest rate hike might come. The US central bank is likely to skip lifting interest rates at its upcoming October policy meeting and deliver a hike in December, according to nearly all economists polled by Reuters, as policymakers signal patience even as stubborn inflation argues for a tougher response.

Sterling supported by BoE tightening expectations as EUR/GBP stays offered

Analysts at ING argue that recent Pound strength in EUR/GBP is not simply a reflection of domestic political popularity, noting that “it seems like sterling is riding on the coat-tails of PM Andy Burnham's popularity. In reality, it looks like there is both independent sterling strength and independent euro weakness at play in EUR/GBP.” The bank acknowledges that “earlier this summer, we had felt that sterling gains would not last,” but says that “greater market confidence in a Bank of England tightening cycle – we look for 25bp hikes in February and November – makes sterling a high-carry European currency.”

Looking ahead, ING expects fiscal developments to have limited market impact, stating that “next week's UK budget looks unlikely to derail the recent EUR/GBP break below 0.8400.” With “the euro still having plenty of room to drop on French politics,” the bank sees scope for the cross to remain under pressure, judging that “EUR/GBP can stay offered in a 0.8360-0,8430 range for the time being.”

Greene flags stalled wage disinflation, keeping BoE hawkish bias intact

Greene’s 7.4/10 FXS Speechtracker score matches the historic average, signaling a steady but clearly hawkish stance rather than an escalation in tone. Emphasis on stalled wage disinflation at levels inconsistent with 2% inflation, alongside a belief that policy should proactively lean against second-round effects, reinforces a bias toward keeping policy tight for longer and limits near-term downside for the Pound.

The remark that the risk of second-round effects is greater than previously thought, even as forward-looking data point to pay growth closer to 3.5%, suggests Greene sees the labor market as still too firm to safely relax policy. References to surprising economic resilience and labor market slack potentially having peaked further support a hawkish interpretation, implying that rate cuts are likely to be delayed and that the Pound may remain supported versus the Euro and the Dollar.

Technical Analysis: GBP/USD keeps a bullish vibe above the 100-day SMA

In the daily chart, GBP/USD retains a mildly bullish bias as spot holds above the 100-day simple moving average (SMA) and comfortably over the Bollinger middle band. Price is edging toward the upper Bollinger band, signaling a test of short-term topside levels, while the Relative Strength Index (14) at 58.6 sits in positive territory without yet signaling overbought conditions, which suggests room for further upside before momentum becomes stretched.

On the topside, immediate resistance is defined by the upper Bollinger band at 1.3412, where a clear daily close above would open the way for a continuation of the recent recovery. On the downside, initial support is offered by the 100-day SMA at 1.3390, with deeper cushions emerging at the Bollinger middle band around 1.3275 and then the lower band near 1.3140, levels that should contain corrective pullbacks while the broader bullish tone persists.