The Pound sells its own inflation spike ahead of a Fed hike

The British Pound (GBP) trades just above 1.3450 on Wednesday, down 23 pips, after a morning that ran in two directions. It climbed into the August inflation release at 06:00 GMT, spiked on it, then spent six hours handing the move back and another 30 pips with it. The release matched the forecast on the monthly rate, on the annual rate and on the core rate. Nothing in it missed, and the Pound sold 53 pips on it.

The inflation that arrived by tanker

Consumer prices rose 3.1% over the year to August, up from 2.9% in July, and that was exactly the forecast. The core rate, which leaves out food, energy, alcohol and tobacco, held at 2.6%, and services prices held at 3.4%. The domestic part of British inflation did not move at all. The part that moved is motor fuel, and a higher Bank Rate does not reopen the Strait of Hormuz.

The distinction is the Pound's problem. A currency gains when its central bank is forced to pay more to hold money, and no central bank is forced by a price it has no way of touching. Britain buys its fuel abroad and pays for it in Dollars, and those Dollars get more expensive when American rates rise. An inflation number that reads as support for the Pound is, once opened, an import bill.

The Pound's rate advantage ends this afternoon

Bank Rate, the Bank of England's own rate, is 3.75%. The American rate is 3.50-3.75% and at 18:00 GMT is expected to become 3.75-4.00%, its first increase since 2023. Take the middle of the American range and money held in Pounds stops paying an eighth of a point more than money held in Dollars and starts paying an eighth of a point less. The Pound has given up roughly 230 pips from its August peak getting ahead of that.

The American consumer helped this morning. Retail sales there rose 1.2% in August against a 0.8% forecast, and the control group, which leaves out fuel, cars and building materials, rose 1.4%. That is a consumer the Fed can keep raising rates on, and the Pound has spent the afternoon at the bottom end of its range.

Where each rate goes next matters more than where it sits tonight, which is why the forecasts published beside the American decision are the part that can move this pair. Futures put the American rate at 4.15% by December and 4.52% by the summer of 2027, while the committee's own last set of projections had it back at 3.6% next year. British futures have Bank Rate reaching 4% by November and around 4.25% in early 2027. Both are being marked up. The Dollar is being marked up faster, and that difference is the only comparison this pair answers to.

Three of the nine have wanted 4% since July

The Bank of England answers at 11:00 GMT on Thursday and is forecast to hold. The vote is forecast at six to hold and three to raise, nobody to cut, which is the split the committee produced in July, when the three voted for an immediate rise to 4%, though futures put the chance of a rise near 30%, up from under 10% a week ago. The three dissenters have a case and it is not in this morning's consumer prices. Factory gate prices, what British producers charge before anything reaches a shop, rose 0.7% in August against a 0.3% forecast and 3.7% over the year against 3.3%, and those prices reach shelves a few months later.

Friday's retail sales carry the majority's half of the argument. Sales are forecast to fall 0.2% in August after a 0.5% fall in July, and to fall 0.2% again with fuel taken out. What moves the Pound on Thursday is not the rate but the count: a fourth name joining the three, or wording in the policy summary that puts November in play. So the Pound gets a hold it expects, from a committee expected to disagree with itself in the same proportions as last time.

Levels and bias

Resistance: Today's high just short of 1.3500 is the first thing overhead, and the pair has not held above that level all week. Above it, 1.3550 has capped every rally since the start of September.

Support: Today's low just under 1.3450 is the floor, and it carried the pair one pip through the 200-day Exponential Moving Average (EMA) before the bid came back. There has been no daily close below that average since late July. Under it sits 1.3400.

Bias: Bearish while 1.3500 caps, with 1.3400 the first objective and 1.3350 behind it. The daily Stochastic Relative Strength Index (Stoch RSI), a momentum gauge, reads near 16 and has been flat along the bottom of its range for three sessions, so a poke back toward 1.3500 would not change the reading. A daily close above it would.

GBP/USD daily chart