GBP/USD dips lower as US inflation rises

• US inflation accelerates by 3.2%
• UK GDP expected to rise 0.1% in Q2

The British pound showed some strength earlier but reversed directions and lost ground after the US inflation report. In the North American session, GBP/USD is trading at 1.2725, up 0.05%.

US headline CPI rises, core rate ticks lower

The US inflation report was somewhat of a mix, but most important was that both headline and core inflation were within expectations. This meant that the reaction of the US dollar was muted following the inflation release.

Headline CPI climbed to 3.2% y/y in July, above the June reading of 3.0% but shy of the consensus estimate of 3.0%. This marked the first time in 13 months that headline CPI accelerated, but the upswing isn’t all that significant, as it was due to base effects. Core CPI ticked lower to 4.7% y/y in July, down from 4.8% in June. The Fed will be encouraged by the fact that on a monthly basis, both headline and core CPI posted a very modest gain of 0.2%, matching the estimate and unchanged from June.

Inflation has fallen sharply in recent months, but the Fed will find it more difficult to bring core inflation down to the 2% target. The sharp drop in energy prices has sent headline CPI lower, but the core rate excludes food and energy prices. Inflation is being driven by services and wages, which explains why core CPI is so much higher than headline CPI.

The inflation report has cemented the Fed holding rates in September, barring a huge surprise. The odds of a pause have risen to 90%, up from 86% prior to the inflation report, according to the CME FedWatch tool. The Fed may well be done with the current rate-tightening cycle, but don’t expect to hear that from anyone at the Fed, which does not want the markets to become too complacent about inflation.

UK GDP expected to rise by 0.1%

The UK will post preliminary GDP on Friday. The consensus estimate stands at 0.1% q/q for the second quarter. If GDP misses the estimate and falls into negative territory, investors could get nervous and send the pound lower. Conversely, if GDP beats the estimate, the pound could gain ground. The Bank of England will be watching carefully, as it digests key economic data ahead of the next meeting on September 21st.

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GBP/USD Technical

• GBP/USD is testing resistance at 1.2747. The next resistance line is 1.2874
•  1.2622 and 1.2495 are providing support

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