GBP/USD trades with mild negative bias around 1.2200 ahead of UK/US inflation data

GBP/USD struggles to capitalize on this week’s modest bounce from a multi-year low.
Stagflation fears and UK fiscal concerns undermine the GBP and weigh on the major.
Subdued USD demand acts as a tailwind for the pair ahead of the UK/US CPI prints.

Haresh Menghani FXStreet

The GBP/USD pair attracts some sellers during the Asian session on Wednesday, albeit it lacks follow-through and remains well within the previous day's broader trading range. Spot prices currently trade around the 1.2200 mark, down 0.20% for the day, as investors now look forward to the release of the high-impact Consumer Price Index (CPI) data from the UK and the US before positioning for the next leg of a directional move.

The crucial CPI report would influence the Bank of England’s (BoE) and the Federal Reserve's (Fed) interest rates outlook, which, in turn, will play a key role in determining the next leg of a directional move for the GBP/USD pair. Heading into the key data risk, the risk of stagflation – a combination of high inflation and weak economic growth – and concerns over the UK’s fiscal situation undermine the British Pound (GBP).

Furthermore, the recent surge in UK borrowing costs contributes to denting sentiment surrounding the GBP and turns out to be a key factor weighing on the GBP/USD pair. The US Dollar (USD), on the other hand, languishes near the weekly low touched in reaction to the release of softer US producer prices on Tuesday and helps limit the downside for spot prices. That said, the Fed's hawkish shift acts as a tailwind for the Greenback.

In fact, market participants now seem convinced that the US central bank would pause its rate-cutting cycle later this month and the expectations were reaffirmed by the upbeat US Nonfarm Payrolls (NFP) report on Friday. This remains supportive of elevated US Treasury bond yields and favors the USD bulls, suggesting that any attempted recovery in the GBP/USD pair might be seen as a selling opportunity and remain capped.

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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