GBP/USD rises as US CPI data bolsters Fed rate cut expectations for September

• GBP/USD edges higher on Tuesday as US CPI data keeps September Fed policy easing bets alive.
• US headline CPI rose 0.2% MoM in July, holding steady at 2.7% YoY; core CPI climbed to 3.1% YoY from 2.9%, led by higher housing, transport, and medical care costs.
• CME FedWatch Tool shows market odds of a 25 bps rate cut in September have climbed to 94%, up from 84% earlier in the day.

The British Pound (GBP) strengthens further against the US Dollar (USD) on Tuesday, with GBP/USD edging higher after the release of mixed UK labor market data and the latest US inflation figures. While signs of cooling employment growth in the UK were offset by robust wage gains, a softer US Dollar following the CPI report helped keep the pair supported, as traders increased expectations that the Federal Reserve (Fed) will resume easing monetary policy as soon as September.

At the time of writing, GBP/USD is trading near the 1.3485 psychological mark, up nearly 0.37% on the day following the US inflation release, extending gains from the European session. Meanwhile, the US Dollar Index (DXY) is under pressure, hovering near its two-week low around 98.30. According to the CME FedWatch Tool, markets are now pricing in a 94% probability of a 25 basis point move in September, up from 84% earlier in the day.

The US Consumer Price Index (CPI) rose 0.2% MoM in July, keeping the annual rate steady at 2.7%, in line with expectations. However, core CPI accelerated to 3.1% YoY from 2.9% in June, driven by higher housing, transport, and medical care costs. While the firmer core reading tempers aggressive easing bets, markets are still pricing in a September Fed rate cut, with futures pointing to a high probability of a 25 basis point move.

In the UK, the Office for National Statistics reported that the Average Earnings Excluding Bonuses rose 5.0% YoY, matching both forecasts and the prior reading, while Average Earnings Including Bonuses slowed to 4.6% from 5.0%, missing expectations of 4.7%. The Claimant Count Change fell by 6,200 in July, defying forecasts for a 20,800 increase and following a prior rise of 15,500. The claimant count rate held steady at 4.4%. Employment growth surprised to the upside, with the economy adding 239,000 jobs in the three months to June versus 134,000 previously. However, the ILO Unemployment Rate stayed at 4.7%, its highest since mid-2021, pointing to persistent slack in the labor market despite strong wage growth.

The Bank of England (BoE) cut its Bank Rate by 25 basis points to 4.00% at its August meeting. The move came in a narrow 5-4 vote, with policymakers emphasizing a "gradual and careful" approach to further easing. The decision reflects a balancing act between supporting a slowing economy and managing persistent wage-driven inflation pressures. In contrast, the Federal Reserve opted to hold rates steady in July, but markets are increasingly confident that monetary policy easing will resume in September, given moderating headline inflation and softening labor market conditions in the US.

This growing divergence in policy trajectories underscores a key driver for GBP/USD, as the BoE has already signaled a cautious and measured approach to further rate cuts, while the Fed remains in a wait-and-see mode, but increasingly dovish as several Fed officials voice support for easing.

Looking ahead, traders will turn their attention to Thursday's UK GDP release and US weekly jobless claims for fresh cues. Stronger UK growth figures could reinforce Pound strength, while upbeat US labor market data might lend some support to the Dollar and limit the pair's upside momentum.