GBP/USD edges lower after US inflation data suggests Fed to take a measured approach to easing

• GBP/USD falls after the release of US CPI data shows headline inflation falling but core remaining stubbornly high. 
• The data suggests the Fed will take a cautious approach to easing and probably cut rates by 25 not 50 bps.
• GBP is pressured after UK GDP comes out flat in July and misses estimates.  
   

GBP/USD is trading marginally lower in the 1.3060s on Wednesday after the release of US inflation data leads to an appreciation in the US Dollar (USD) amid prospects of a more measured approach to easing from the Federal Reserve (Fed) whilst the Pound Sterling (GBP) loses ground following the release of flat economic growth data. 

US consumer prices rose more or less in line with expectations, although the annual change in the headline Consumer Price Index (CPI) did undershoot economists’ expectations by a point, coming out at 2.5% instead of the 2.6% forecast, according to data from the US Bureau of Labor Statistics on Wednesday. 

Core CPI (ex food and energy) also rose as expected but monthly core CPI rose by a higher-than-expected 0.3% suggesting some stubbornness in core prices, which analysts say comes from sticky dwelling inflation. 

Although the data was mixed, it showed inflation remaining sufficiently high for the Fed not to want to slash interest rates at its next meeting but rather adopt a more measured approach. The probabilities of a “jumbo” 50 basis points (bps) cut at the September 17-18 Fed meeting fell to only 15% after the release, from around 27% before. A 25 bps (0.25%) cut remains fully priced in. 

“Overall, inflation appears to have been successfully tamed but, with housing inflation still refusing to moderate as quickly as hoped, it hasn’t been completely vanquished. Under those circumstances, we expect the Fed to take a measured approach to cutting interest rates,” remarked Paul Ashworth, Chief North America Economist at Capital Economics. 

With the chances of the larger cut in US interest rates dwindling, the USD strengthened (GBP/USD fell), since relatively higher interest rate expectations are usually supportive of a currency because they lead to higher foreign capital inflows. 

Data out of the UK, meanwhile, painted a negative picture of the economic outlook for the country, weighing on Cable. The Gross Domestic Product (GDP) growth rate in July failed to rise (0.0%) when economists had expected a 0.2% increase, according to data from the Office of National Statistics (ONS) on Wednesday. Industrial and manufacturing production both came out below-expectations, with the former falling 0.8% month-over-month and negative 1.2% annually in July, and the latter declining 1.0% and 1.3% respectively.