GBP/USD consolidates in a range above mid-1.2700s ahead of inflation data from UK and US

GBP/USD struggles to lure buyers ahead of the crucial inflation data from the UK and the US.
A combination of factors keeps the USD bulls on the defensive and lends support to the pair.
The fundamental backdrop supports prospects for an extension of a one-week-old uptrend.

The GBP/USD pair ticks lower during the Asian session on Wednesday and moves away from over a two-week high, around the 1.2870-1.2875 region touched the previous day. The downside, however, remains cushioned as traders keenly await the release of the latest consumer inflation figures from the UK and the US.

The UK CPI will play a key role in influencing the Bank of England's (BoE) monetary policy decision and drive the British Pound (GBP). Apart from this, the crucial US CPI report will be scrutinized for cues about the Federal Reserve's (Fed) rate cut path, which, in turn, should provide some meaningful impetus to the US Dollar (USD) and help in determining the next leg of a directional move for the GBP/USD pair.

Ahead of the high-impact macroeconomic data, the GBP might continue to draw some support from Tuesday's UK data showing a surprise drop in the unemployment rate. This, to a larger extent, overshadowed a jump in the number of people claiming unemployment-related benefits, by 135 K in July, and a sharp deceleration in the wage growth, from the 5.7% YoY rate to 4.5% during the three months to June.

The USD, on the other hand, is undermined by expectations for bigger interest rate cuts by the Fed, bolstered by the softer-than-expected US Producer Price Index (PPI) on Tuesday. Apart from this, a generally positive risk tone keeps the USD bulls on the defensive and should act as a tailwind for the GBP/USD pair. Hence, any meaningful corrective slide might be seen as a buying opportunity and remain limited.

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.

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