GBP/USD Price Holds 1.3640 as Traders Await Fed Cut and UK Inflation

GBP/USD Holds 1.3640 as UK Inflation Prints 3.8% and Fed Cut Looms

The GBP/USD pair is trading near 1.3640, retreating from highs at 1.3677 during Wednesday’s Asian hours. Sterling slipped after two straight sessions of gains, with markets awaiting the release of the UK’s Consumer Price Index (CPI) and the Federal Reserve’s policy verdict later in the day.

UK Inflation Dynamics Keep Bank of England on Hold

The UK CPI for August is projected at 3.9% YoY, up from 3.8% previously, while monthly inflation is expected at 0.3%, triple July’s 0.1%. A hotter print would strengthen expectations that the Bank of England (BoE) will hold its rate at 4%. Core CPI has eased slightly to 3.6%, but this aligns with BoE projections. A Reuters poll suggests that economists see at least one more cut before the end of 2025, but near-term data keeps the BoE in wait-and-see mode.

Federal Reserve Set for First Cut Since December

The Federal Reserve is widely expected to deliver a 25 bps cut, lowering the federal funds rate into the 4.00%–4.25% range. The CME FedWatch tool assigns nearly 100% probability to this move. However, some uncertainty remains: Fed Governor Stephen Miran, appointed by President Trump, has argued for a deeper 50 bps cut. Fed Chair Powell’s press conference and the updated dot plot will be critical in signaling whether markets should expect additional reductions in October and December.

U.S. Data Flow Strengthens Dovish Bets

US Retail Sales for August surprised to the upside with a 0.6% MoM increase, beating expectations of 0.2%. Both Retail Sales Control Group and ex-Autos rose 0.7%, confirming strong consumer spending. Yet, housing data showed cracks: Housing Starts plunged 8.5% MoM to 1.307 million, their lowest since May, while Building Permits fell 3.7%. Labor market softness combined with retail strength complicates the Fed’s decision, but dovish pricing remains dominant.

Market Positioning and Dollar Weakness

The US Dollar Index (DXY) hovers near 96.70, weighed by expectations of an extended easing cycle. Markets are pricing up to 75–100 bps of cuts by year-end. Morgan Stanley and Deutsche Bank forecast 25 bps cuts at each Fed meeting in September, October, and December. This heavy dovish tilt has left the dollar vulnerable, giving the pound room to recover despite moderate UK data.

Technical Outlook: Sterling Eyes 1.3700 Breakout

Technically, GBP/USD has broken above the 1.3575 resistance, which now acts as support. Current trading near 1.3640–1.3660 keeps momentum bullish, with resistance at 1.3681 and 1.3700. A successful break targets the yearly peak at 1.3788, with a psychological barrier at 1.3800. On the downside, a drop below 1.3650 opens the path to 1.3600, with September 16 low at 1.3596 and the 20-day SMA at 1.3516 providing deeper support. RSI near 66 signals overbought conditions but still favors bulls as long as the pair trades above its 30-SMA.

Verdict: GBP/USD Bias Remains Bullish Into Fed Decision

With UK inflation holding steady at 3.8%, BoE policy anchored at 4%, and the Fed set to deliver the first cut since December, the risk-reward leans bullish for GBP/USD. Traders should watch the 1.3681–1.3700 resistance zone: a breakout would expose 1.3788–1.3800, while downside remains limited above 1.3600. Based on current fundamentals and technicals, GBP/USD is a Buy with targets at 1.3700–1.3800, contingent on Powell not surprising markets with hawkish pushback.

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