The British Pound goes into retail sales with its November hike already priced

Inflation data released on Wednesday showed the UK economy beating expectations on both headline and core measures, but the British Pound experienced minimal movement. The GBP/USD pair held just under 1.3400, with no daily close above this level since September 15. Traders had already priced in a Bank of England (BoE) rate hike for November 5, leaving little room for the actual number to impact the currency.

The Consumer Price Index (CPI) inflation rose to 3.5% in September from 3.1%, exceeding the 3.4% forecast, while the core rate increased to 2.8% from 2.6%. Prices climbed 0.4% on the month, surpassing the 0.3% forecast. The largest contributor to this rise in transport costs, with diesel reaching its highest level since July 2022 and Brent crude nearing $109.00 per barrel amid the US-Iran conflict.

Producer output prices rose 0.8% on the month, slightly above forecast, indicating that the costs driving future shop prices continue to escalate.

The probability of the BoE raising the UK's Bank Rate from 3.75% on November 5 stood at about 96% after the release, up from around 93% prior to it. The Pound gained a boost from expectations of a hike, and this increase was already priced in. The same release reduced the odds of a second hike by December to around 48% from 58%, suggesting that a hotter inflation report left the market anticipating fewer UK interest rate hikes in the year.

BoE Governor Bailey stated on October 16 that he saw little evidence of energy shock effects translating into wages and the prices of other goods, which economists refer to as second-round effects.

Services inflation, the figure the BoE closely monitors, rose to 3.7% from 3.4% in Wednesday's report, and recreational and cultural prices increased to 2.3% from 1.6%. A spillover into services is crucial for turning one hike into multiple hikes, and multiple hikes are the aspect of the BoE story yet to be reflected in the Pound's price.

October's inflation figures, released after the November 5 decision, serve as the last data point the Monetary Policy Committee (MPC) considers before voting. The Office for National Statistics (ONS) reported public sector net borrowing at £24.52 billion for September, with spending and debt interest rising faster than income. This fiscal responsibility will be discussed in Chancellor Healey's first Budget on October 28.

The 10-year gilt yield ended September near 5.4%, after peaking at 19-year highs earlier in the month. A Budget that bolsters borrowing could affect the Pound through the bond market before the BoE vote. GfK consumer confidence is forecast at -15 after -13. Retail sales are expected to fall 0.1% on the month, following a 0.5% rise, with annual growth decelerating to 1% from 2.4%.

Excluding fuel, retail sales are projected to grow 1.5% in the year, outpacing total growth. The Pound Sterling's key support level is the 200-day Exponential Moving Average (EMA), just under 1.3400, which has not been breached since mid-September.