Pound Sterling Under Pressure Against Euro and Dollar After Big Fall in Inflation

GBP/EUR Year-End 2025 Forecast
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The British pound declined in value against the euro and dollar after the UK reported inflation fell in November, while annual inflation rose by less than feared.

The ONS reported inflation was at 3.2% y/y in November, which was well below the consensus estimate for 3.5% y/y. In the month of November, inflation actually fell by 0.2% m/m.

This was softer than the 3.4% predicted by the Bank of England.

The data bolsters the case for Thursday's all-but-certain interest rate cut at the Bank of England, while it will encourage markets to raise expectations for further reductions in 2026.

"It's time to ease, ease, ease. Sterling fell after hitting a two-month high yesterday," says Neil Wilson, analyst at Saxo Bank.

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Easing food inflation helped bring the headline lower, as did a lower energy price cap rise in October - as compared to a year before - which means electricity prices are up 2.8% and gas prices 2.1% y/y.

The November inflation data follows Tuesday's news that wage growth, a key driver of inflation, slowed in the three months to October.

The impact of the data on sterling was swift: the pound to euro exchange rate fell from 1.1424 to 1.14 in the immediate aftermath of the data. The pound to dollar exchange rate fell from 1.3385 to 1.3346:

By mid-morning, the losses in GBP/EUR extended to 1.1373 and GBP/USD was down at 1.3328.

In fact, pound sterling traded lower against all major currencies, confirming an idiosyncratic impact of these inflation data.

Drilling down further: there was welcome news on the important core inflation front, with November seeing -0.2% m/m and 3.2% y/y, below the 3.4% the market had anticipated.

The CPI services inflation rate, which the Bank of England is particularly concerned with, eased slightly from 4.5% to 4.4%.

To be sure, this element of the inflation basket is still too high, but the reckoning is that falls in headline inflation will help supress inflation expectations in the economy, and bring these stubborn components down.

With further rate cuts at the Bank in 2026 almost certain, the pound will remain under pressure, particularly against currencies whose central banks will keep rates unchanged, or even raise them.

GBP/EUR Year-End 2025
Built from leading bank forecasts.
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