21.10.202613:48 Forex Analysis & Reviews: Bank of England caught between two fires: 3.5% inflation and hawkish signal from Megan Greene

UK inflation surprised to the upside in September, and the pound rose on the data. The consumer price index came in at 3.5% year-on-year versus a 3.4% forecast and 3.1% a month earlier; month-on-month it rose 0.4% versus a 0.3% forecast and 0.5% in August. Core inflation accelerated to 2.8% versus a 2.7% forecast and 2.6% previously. Producer prices rose even more sharply: input prices increased 8.3% y/y versus a 7.2% forecast, and factory gate prices rose 4.6% versus a 4.3% forecast. Such a jump in costs typically feeds through to consumer prices over time, so inflationary pressure looks persistent.

The strong price readings arrived against a backdrop already skewed toward tightening. Bank of England MPC member Megan Greene warned on Tuesday that the easing of wage pressures has stopped and the labor market is tighter than officials expected. Speaking at the London School of Economics, she urged colleagues to act preemptively against the risk of a self-reinforcing price cycle and to raise rates at the next meeting in early November. "There are fewer labor market spare capacities than we thought, and perhaps the market has already peaked," she said.

So far labor market weakness has reassured many at the BoE, since it should have restrained inflation from the energy shock linked to the Iran conflict. Greene, a hawk who favors higher rates, says progress in reducing wage pressures has stalled. Leading indicators, including surveys, point to wage growth plateauing around 3.5%—above the level consistent with a return to the 2% target—so the risk of second-round effects is higher than previously thought.

Employment data confirmed her assessment. The recent report showed the labor market has strengthened in recent months: employers hired more people, and unemployment unexpectedly fell. Private sector pay growth accelerated to 3% over three months to August—the first pick-up since late 2024. Greene noted that after a series of strong prints the economy has been surprisingly resilient, implying less spare capacity than some labor indicators suggest.

A key debate is what wage growth is compatible with price stability. The BoE judges roughly 3.25% to be sustainable, but Greene said during Q&A that because of weak productivity and de-globalization effects, wages may need to settle nearer 3%—meaning more wage disinflation is required to secure a return to the price target.

Last month Greene was in the minority pressing for an immediate hike, but now a majority of committee members are expected to vote for a 25-bp increase at the November 5 meeting. Several BoE officials have already signaled they would consider a raise if energy prices return to elevated levels, which the Bank forecasts could push inflation above 4% early next year.

For the pound, the combination of stronger inflation and Greene's hawkish tone is supportive because it raises the odds of further tightening. I lean toward the view that the pound will have enough upside drivers to stay firmer until the November 5 meeting, provided wage and price momentum do not slow materially.

Technical picture for GBP/USD

Pound buyers need to take the nearest resistance at 1.3402. Only that would allow targeting 1.3440, above which further gains would be difficult. The farther target is the 1.3465 area. On a decline, bears will try to seize control of 1.3365. If they succeed, a break of the range would hit bulls hard and push GBP/USD to a low near 1.3335 with scope to reach 1.3300.