GBP/USD returns above 1.3500 as traders brace for hotter UK inflation

The Pound bounces at 1.3585, and returns to 1.3525 but remains within a bearish channel from Last Friday's highs.
Investors are dialing down GBP short bets with July's UK CPI data in focus.
UK inflation is expected to have accelerated to a 3.7% yearly rate, the highest reading in almost two years.

Guillermo Alcala FXStreet

The Pound is retracing some losses on Tuesday with the US Dollar pulling back from recent highs amid a moderately positive market sentiment, and investors looking at Wednesday’s UK CPI reading that might give further reasons to BoE hawks.

The GBP/USD pair has bounced up from intra-day lows at 1.3485 to reach 11.3525 at the moment of writing, but keeps trading within a bearish channel from last Friday’s highs, in a likely corrective reaction after a nearly 3% rally from August 1 lows, at 1.3145.

Concerns about higher inflation keep the Pound supported

Investors’ focus is on July’s UK inflation figures, which are expected to show an acceleration to a 3.7% yearly pace in the headline CPI, up from 3.6% in June and 3.4% in May, according to market forecasts.

Price pressures have been growing steadily since bottoming at 1.7% in September and are expected to hit a nearly two-year high in July. This is likely to strengthen the case for BoE hawks to oppose further rate cuts and provide additional support for the Pound.

The US Dollar, on the other side, remains depressed, following apparent advances towards a peace deal in Ukraine that have triggered a moderate risk appetite in an otherwise calm, holiday session. Investors keep one eye on the Jackson Hole Symposium, and especially on Fed Chairman Powell's conference, to confirm market expectations of a rate cut in September.

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.

Economic Indicator

Consumer Price Index (MoM)

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 also the inflation measure used in the government’s target. The MoM figure compares the prices of goods in the reference month to the previous month. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

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