GBP/USD dips on hot US inflation report

The British pound is lower on Wednesday. GBP/USD is trading at 1.2400, down 0.37% on the day.

US CPI surprises on the upside, hits 3%

The January inflation report was hotter than expected, giving the US dollar a boost against the major currencies today. Headline CPI rose 3% y/y, above the December gain of 2.9% which was also the market estimate. Monthly, CPI rose 0.5%, up from 0.4% in December and above the market estimate of 0.3%. It was the highest monthly inflation rate since August 2023.

The core rate, which excludes food and energy, rose 3.3% from 3.2%, above the market estimate of 3.2%. Monthly core CPI accelerated to 0.4% from 0.2%, above the market estimate of 0.3%.

The inflation report didn’t change expectations about the March meeting, with the Fed virtually certain to hold rates. However, expectations for a cut in May have dropped to just 9%, compared to 21% a day ago. The economy is performing well and the Fed will be reluctant to lower rates again until it sees inflation moving lower.

Fed Chair Powell repeated a familiar message in testimony before a Senate Banking committee on Tuesday, saying that the Fed “does not need to be in a hurry” to adjust policy. Powell said that rate policy remains restrictive but the Fed would be careful not to lower rates too quickly or too slowly. Powell deflected a question about Trump’s tariffs and US trade policy but acknowledged that tariffs could lift inflation and complicate the Fed’s ability to lower rates.

The UK releases GDP on Thursday, with little change expected from the sputtering UK economy. Annually, GDP is projected to remain unchanged at 1%, while the GDP 3-month average to December is expected to decline by 0.1%, compared to a flat reading in the previous release. The economy contracted in the third quarter and may show a small gain in Q4 thanks to increased government spending.

GBP/USD Technical

• GBP/USD tested support at 1.2411 earlier. Below, there is support at 1.2368
• 1.2491 and 1.2534 are the next resistance lines

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