GBP/USD has recovered from its early decline and is trading almost unchanged near 1.3495 during Thursday’s European session. The rebound comes as investors place greater emphasis on reduced expectations for near-term Federal Reserve rate hikes than on continuing geopolitical tensions in the Middle East.
The US Dollar Index (DXY), which measures the Greenback against six major currencies, is trading around 99.90, down approximately 0.1%. Recent US economic developments have encouraged markets to reduce expectations for additional Fed tightening, reflecting moderating inflation pressures alongside increasing concerns about the labor market.
According to the CME FedWatch Tool, the probability of the Federal Reserve keeping interest rates unchanged at its September meeting has risen to nearly 60%, compared with just 30.4% a month earlier. This shift has weakened demand for the US Dollar and provided some support for GBP/USD.
The latest US Consumer Price Index (CPI) data reinforced the cautious Fed outlook. July headline inflation increased 3.4% year-on-year, while core CPI rose 2.5%. Monthly headline and core inflation increased 0.1% and 0.2%, respectively, broadly matching forecasts. The figures indicate that underlying price pressures remain above the Fed’s target but have not shown a broad-based acceleration.
Attention now turns to Thursday’s US Producer Price Index (PPI), with annual headline and core growth expected to moderate to 4.9% and 4.2%, respectively. A softer reading could further reduce expectations for additional Fed tightening and weigh on the Dollar.
Sterling is also receiving support from stronger-than-expected UK economic activity. June GDP increased 0.3% month-on-month, exceeding expectations for a 0.1% contraction, with services output rising 0.4%. However, second-quarter GDP expanded 0.4% quarter-on-quarter, matching forecasts and only slightly exceeding the Bank of England’s 0.3% projection.
Consequently, the stronger growth figures provide some support for Sterling but are unlikely to significantly alter expectations for BoE policy. GBP/USD therefore remains sensitive to upcoming US inflation data and broader interest-rate expectations.
Trade Idea: Consider buying GBP/USD above 1.3480, targeting 1.3570, with a stop-loss below 1.3440 if Dollar weakness persists.