**GBP/USD Retreats From Two-Week High as US Dollar Firms Ahead of Inflation Data**
*By Canberk Koç, as originally reported on FXStreet*
The GBP/USD currency pair, after briefly climbing to its highest level in two weeks, has started retreating in response to a stronger US Dollar as market participants brace for crucial US inflation data. This week’s movement in the pair highlights an increasingly cautious atmosphere on global currency markets as both economic and geopolitical risks come to the forefront, shaping investor sentiment and driving the foreign exchange market’s next big move.
### Overview
– GBP/USD surged to a two-week high during early European trading hours before reversing direction.
– The advance was capped as the US Dollar found renewed strength ahead of the release of major inflation metrics like the US Consumer Price Index (CPI) and Producer Price Index (PPI).
– Ongoing anticipation regarding the Federal Reserve’s next move, combined with Bank of England policy expectations and mixed UK data, continues to dictate the pair’s short-term path.
### Recent Performance
GBP/USD opened the week on positive ground, buoyed by profit-taking in the US Dollar and a broad risk-on mood that saw investors shift out of safe-haven assets. The pair touched levels above the psychologically important 1.2800 mark, its best since late July. However, the Pound’s momentum proved short-lived as the Dollar Index rebounded, erasing earlier gains and sending GBP/USD back below the 1.2770 area in afternoon trading.
Recent price action underscores the sensitivity of currency pairs to shifting expectations around monetary policy in the US and the UK. With both economies struggling with persistent inflationary pressures and uncertain growth prospects, traders remain adaptable, ready to pivot as new economic data guides central bank outlooks.
### Drivers Behind the Move
Several interrelated factors have shaped GBP/USD price movement this week.
**1. US Dollar Strengthening**
– The US Dollar Index (DXY), which tracks the greenback against major peers, climbed back from recent lows.
– Stronger US Treasury yields lent support to the Dollar as bond markets priced in a cautious approach from the Federal Reserve.
– Safe-haven flows have returned amid ongoing uncertainty about the global outlook, notably in relation to China’s economic woes and the ongoing conflict in Ukraine.
**2. Market Anticipation Ahead of US Inflation Data**
– The market’s primary focus is on the upcoming US Consumer Price Index (CPI) data due later this week, which will offer fresh insight into the trajectory of US prices.
– Analysts expect the CPI to reflect continued disinflation, albeit with certain sticky components such as services inflation potentially running hotter.
– Producer Price Index (PPI) figures will also be closely watched to gauge business cost pressures, which can eventually filter through to consumer prices.
**3. Federal Reserve Rate Hike Odds**
– Markets remain divided on whether the Federal Reserve will consider further rate hikes before pausing its historic tightening cycle.
– Recent commentary from Fed officials has emphasized a data-dependent approach, keeping traders laser-focused on every inflation and jobs release.
– Swaps markets currently price in a lower probability of an additional September hike, which has limited the upside for the Dollar in recent sessions but rekindled gains as inflation uncertainty grows.
**4. UK Economic Landscape**
– Mixed UK economic data has prevented the Pound from mounting a sustained rally.
– The latest GDP data for the UK showed stagnation, with output flatlining and business activity surveys pointing to ongoing softness in key sectors like manufacturing and construction.
– Sticky UK inflation has raised prospects for continued tightening by the Bank of England, but growth concerns have prompted speculation that the end of the hiking cycle may be drawing near.
**5. Technical Factors**
– Sterling met resistance near the 1.2800 level, a crucial psychological and technical barrier which has capped gains in recent trading periods.
– Traders also note the formation of a short-term range, as buyers lose momentum and sellers
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