GBP/USD holds position above 1.3150 ahead of UK CPI, Fed interest rate decision

• GBP/USD appreciates ahead of the release of UK inflation data on Wednesday.
• The UK Consumer Price Index might have risen by 2.2% YoY in August, matching the rate observed in July.
• The US Dollar struggles due to rising odds of the FOMC opting for a bumper 50 basis point rate cut in September.

GBP/USD inches higher to near 1.3160 during the Asian hours on Wednesday. Traders await the release of August Consumer Price Index (CPI) figures from the United Kingdom (UK). Traders will shift their focus on the Federal Reserve (Fed) interest rate decision scheduled later in the North American session.

The UK CPI is anticipated to have increased at an annual rate of 2.2% in August, consistent with the July figure. The core annual CPI is expected to rise to 3.5%, up from the previous 3.3%. Additionally, monthly inflation is projected to grow by 0.3%, following a decline of 0.2% in July.

The Bank of England is set to announce its monetary policy on Thursday, with inflation levels potentially influencing their decision. Financial markets expect the BoE to maintain its current interest rate at 5%, with a more aggressive approach anticipated starting in November. The BoE forecasts inflation could rise to 2.75% in the coming months before gradually declining and potentially falling below the 2.0% target by 2025.

The US Dollar faces challenges amid rising expectations that the Federal Open Market Committee (FOMC) may announce a substantial 50 basis point rate cut on Wednesday. The CME FedWatch Tool indicates that markets are assigning a 33.0% probability to a 25-basis-point rate cut, while the likelihood of a 50-basis-point cut has risen to 67.0%, up from 62.0% just the previous day.

On Tuesday, US Retail Sales rose by 0.1% month-over-month in August, following a revised 1.1% increase in July, surpassing expectations of a 0.2% decline and indicating resilient consumer spending. Meanwhile, the Retail Sales Control Group increased by 0.3%, slightly below the previous month's 0.4% rise.