GBP/USD climbs as mixed US inflation data bolsters Fed rate cut expectations
- GBP/USD rebounds towards 1.3550 as the Greenback weakens following mixed US inflation data.
- US August CPI data showed headline inflation rising more than expected, but a steady core print reinforced expectations that the Fed will deliver a 25-basis-point rate cut next week.
- The Bank of England is expected to keep the Bank Rate unchanged at 4.00% next week, as policymakers take a more cautious approach amid sticky UK wage growth.
The British Pound (GBP) gains traction against the US Dollar (USD) on Thursday, with GBP/USD reversing earlier losses as investors digested a mixed US inflation report that failed to shake expectations of a Federal Reserve (Fed) interest rate cut next week. At the time of writing, the pair is trading around 1.3540, recovering decisively from intraday lows near 1.3493.
The US Consumer Price Index (CPI) rose 0.4% MoM in August, beating the forecast of 0.3% and accelerating from 0.2% in July, driven largely by higher energy and shelter costs. On an annual basis, headline CPI held steady at 2.9%, in line with expectations but marking a notable uptick from 2.7% previously.
However, the Core CPI, which strips out food and energy prices and is more closely watched by the Fed, rose 0.3% MoM and 3.1% YoY, matching both forecasts and July’s readings.
Despite the upside surprise in headline inflation, the stable core CPI print reinforced market expectations that the Fed will proceed with a 25 basis point rate cut at its monetary policy meeting next week. Recent dovish signals from Fed officials, coupled with softer labor market data and a weaker-than-expected Producer Price Index (PPI), have strengthened the case for policy easing.
Traders now see little justification for a more aggressive cut, especially with underlying inflation appearing contained. According to CME’s FedWatch tool, the odds of a 25 basis point rate cut in September rose to 94%, up from 90% before the release. Traders also continue to fully price in three rate cuts by the end of 2025, reflecting confidence that the disinflation trend remains broadly intact.
Focus now turns to the Bank of England (BoE), which is set to announce its policy decision on September 18, just one day after the Fed. The BoE is widely expected to leave the Bank Rate unchanged at 4.00%, having already delivered five cuts earlier this year. The emerging policy divergence — with the Fed moving toward easing while the BoE holds steady could offer near-term support to GBP/USD, as narrowing rate differentials work in Sterling’s favor.
(This story was corrected on September 11 at 14:00 GMT to say that the CME FedWatch tool showed a 94% probability of a 25 basis point rate cut in September, not December.)
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Author
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
