GBP/USD consolidates around 1.2700 mark ahead of UK CPI, FOMC decision

GBP/USD lacks any firm intraday direction and oscillates in a range on Wednesday.
The fundamental backdrop warrants some caution for aggressive bearish traders.
Traders opt to wait for the UK November CPI report and the crucial FOMC decision.

Haresh Menghani FXStreet

The GBP/USD pair struggles to capitalize on a two-day-old recovery move from the vicinity of the 1.2600 mark, or a three-week low touched on Monday and oscillates in a narrow band during the Asian session. Spot prices currently trade around the 1.2700 round figure, nearly unchanged for the day as traders keenly await the outcome of the highly-anticipated FOMC policy meeting before placing fresh directional bets.

The Federal Reserve (Fed) is widely expected to lower borrowing costs by 25 basis points and adopt a more cautious stance on cutting interest rates going forward. Hence, investors will closely scrutinize the so-called dot plot and Fed Chair Jerome Powell's comments at the post-meeting press conference for cues about the future rate-cut path. This, in turn, will influence the near-term US Dollar (USD) price dynamics and provide some meaningful impetus to the GBP/USD pair.

Meanwhile, the prospects for a less dovish Fed, along with speculations that US President-elect Donald Trump's policies may lead to an increase in government borrowing and boost inflation, remain supportive of elevated US Treasury bond yields. Apart from this, persistent geopolitical risks and trade war fears continue to act as a tailwind for the USD, which, in turn, seems to cap the GBP/USD pair, though reduced bets for a rate cut by the Bank of England (BoE) lend support.

The monthly UK jobs report released on Tuesday showed that regular pay grew at a faster-than-expected annual pace of 5.2% between August and October. The data justifies the need for the BoE to keep rates on hold at its meeting this week and also forced investors to trim their bets for three 25 basis points rate reductions next year. This could underpin the British Pound (GBP) and limit losses for the GBP/USD pair ahead of the UK consumer inflation figures later today.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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