GBP/USD falls after US inflation data suggests the Fed is taking a measured approach to easing

• GBP/USD falls after US CPI data shows headline inflation easing but core remains stubbornly high.
• Data suggests the Fed will take a cautious approach to easing and likely cut rates by 25, not 50 bps.
• GBP is under pressure after UK GDP came 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 led to an appreciation in the US dollar (USD) on the prospect of a more measured approach to easing from the Federal Reserve (Fed). , while the pound Sterling (GBP) loses ground after the release of flat economic growth data.

US consumer prices rose more or less as expected, although the annual change in the consumer price index (CPI) beat economists’ expectations by a point, coming in 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 a more than expected 0.3%, suggesting some stubbornness in core prices, which analysts say it comes from sticky housing inflation.

While the data was mixed, it showed that inflation remains high enough that the Fed may not want to cut interest rates at its next meeting, but rather take a more measured approach. The odds of a 50 basis point (bps) “jumbo” cut at the September 17-18 Fed meeting fell to just 15% after the release, from about 27% beforehand. A discount of 25 bps (0.25%) remains fully priced.

“Overall, inflation appears to have been successfully contained, but with housing inflation still refusing to moderate as quickly as hoped, it has not been completely defeated. Under these circumstances, we expect the Fed to take a measured approach to cutting interest rates,” noted Paul Ashworth, chief economist for North America at Capital Economics.

As the chances of further US interest rate cuts recede, the USD strengthened (GBP/USD fell) as relatively higher interest rate expectations are usually supportive of a currency as they lead to higher foreign capital inflows .

Meanwhile, data from the UK painted a negative picture of the economic outlook for the country, affecting cable. The growth rate of Gross Domestic Product (GDP) in July did not rise (0.0%) when economists had expected a rise of 0.2%, according to data from the Office for National Statistics (ONS) on Wednesday. Industrial and manufacturing output both came in below expectations, with the former down 0.8% month-on-month and negative 1.2% year-on-year in July, and the latter down 1.0% and 1.3% respectively %.