GBP/USD edges higher to near 1.2700 ahead of UK CPI inflation data

GBP/USD appreciates due to reduced expectations of another rate cut by the Bank of England this year.
The UK’s CPI inflation is projected to increase 2.2% YoY and 0.5% MoM in October.
The US Dollar may appreciate as traders expect pro-inflationary policies from the incoming Trump administration.

GBP/USD continues to gain ground for the third successive session, trading around 1.2690 during the Asian hours on Wednesday. The Pound Sterling (GBP) strengthens as markets price in less than a 20% chance of another rate cut from the Bank of England (BoE) this year, following the BoE Monetary Policy Report Hearings on Tuesday, where the central bank described interest rates as "moderately restrictive."

On Wednesday, traders await key UK data, including the Consumer Price Index (CPI) inflation and Retail Price Index (RPI) figures for October. These numbers could influence the Bank of England's (BoE) decision on whether to pursue additional rate cuts this year.

The UK’s CPI inflation is projected to rise to 2.2% year-on-year in October, up from 1.7% the previous month. The monthly CPI for October is expected to increase by 0.5%, compared to a flat 0.0% in September. Additionally, the Retail Price Index (RPI) is likely to have grown by 3.4%, up from 2.7% previously.

The US Dollar (USD) remained steady on Wednesday after three days of losses, weighed down by weaker-than-expected economic data released on Tuesday. However, the downside for the Greenback may be limited as investors expect pro-inflationary policies from the incoming Trump administration, such as tax cuts and higher tariffs. These measures could drive up inflation, potentially prompting the Federal Reserve to slow the pace of rate cuts.

Kansas City Fed President Jeffrey Schmid stated on Tuesday that he anticipates both inflation and employment will move closer to the Fed's targets. Schmid explained that rate cuts reflect the central bank's confidence in inflation heading toward its 2% goal. He also noted that while large fiscal deficits might not directly cause inflation, the Fed may need to respond to any emerging inflationary pressures by raising interest rates.

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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