GBP/USD retreats from two-week high as US Dollar firms ahead of inflation data

The British Pound (GBP) edges lower against the US Dollar (USD) on Monday, snapping its recent advance as the Greenback firms ahead of Tuesday’s US Consumer Price Index (CPI) report. A modest rebound in the US Dollar is weighing on the Pound, with GBP/USD retreating from a two-week high reached earlier in the day.

At the time of writing, the GBP/USD pair is inching slightly lower, trading around 1.3407 during the American session. Meanwhile, the US Dollar Index (DXY), which measures the Greenback’s value against a basket of six major currencies, is rebounding modestly from near a two-week low, last seen around 98.50.

Last week, the Bank of England (BoE) cut its main interest rate by 25 basis points (bps) to 4.00%, the lowest level since March 2023. The decision marks a significant moment for the UK economy, signaling a shift in the central bank’s focus from taming inflation to stimulating growth. However, the move was accompanied by a hawkish tone, as the narrow 5-4 vote and cautious forward guidance suggested policymakers are not in a hurry to deliver further easing. The BoE acknowledged that inflation remains above target and warned that additional cuts will depend on incoming data.

Following the decision, market expectations for further BoE easing in 2025 have shifted, with investors now pricing in only one more cut this year, likely in November, and a growing bet that the next move could be delayed until early 2026.

Looking ahead, Tuesday’s UK labor market report will be a key test for the BoE’s stance. Markets expect the unemployment rate to hold steady at 4.7%, but any signs of further softening in employment or wage growth could bolster expectations for another rate cut later this year. Conversely, resilient figures may reinforce the view that the central bank will pause before taking further action. Attention will then turn to Thursday’s Gross Domestic Product (GDP) data, which could provide additional clues on the economy’s momentum and influence the BoE’s policy outlook.

On the US side, Tuesday’s CPI release is likely to be a major driver for the Greenback, with markets already pricing in high odds of a September rate cut by the Federal Reserve (Fed). A hotter-than-expected reading could temper those expectations and lend support to the US Dollar, while softer inflation data may reinforce the case for easing, reigniting selling pressure on the Greenback and offering support to GBP/USD.