UK inflation holds - What next for GBP?

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waterman

Written by Dan Waterman
October 22nd 2025
Money markets bet a UK interest rate cut happens in December and causes GBP to fall slightly across the board....

The Pound has lost 0.2% today after the UK inflation rate holds at 3.8%.

The long-standing rule in the FX world amongst the major nations of; higher inflation = a stronger currency, has today beaten our expectations of 2025's narrative to continue of; a lower bond yield = a stronger currency.

Sterling is in the red today after money markets see a UK interest rate cut in December at a chance of 70%, up from 40% before the inflation print.

Personally, I fully expected to see a rate cut in either November or December anyway, following the rough theme of 1 interest rate cut per quarter witnessed in the last year or so (plus the history between the UK & US keeping interest rates close within 0.5% at any one time).

As expected, UK bond yields dropped following the inflation news, notably the 10-year gilt (4.4% from 4.55% which was down from 4.7% 1-month ago). This data-set helps GBP overall, just not today it would seem.

The UK inflation report for September was a positive one.

Food inflation dropped from 5.1% in August to 4.5% in September, a very welcome reading for all. And not only did we not see the expected 4% peak on the headline inflation rate, but the more important core inflation rate (what the BoE monitor) actually dropped from 3.6% to 3.5% and below the expected 3.7%.

This would be why £ has been devalued today, as the data is the exact opposite to what was anticipated and therefore helps make the banks interest rate decision slightly easier in the meetings ahead with inflation less hot.