GBP/USD climbs as mixed US inflation data bolsters Fed rate cut expectations

• GBP/USD rebounds towards 1.3550 as the Greenback weakens following mixed US inflation data.
• US August CPI data showed headline inflation rising more than expected, but a steady core print reinforced expectations that the Fed will deliver a 25-basis-point rate cut next week.
• The Bank of England is expected to keep the Bank Rate unchanged at 4.00% next week, as policymakers take a more cautious approach amid sticky UK wage growth.

The British Pound (GBP) gains traction against the US Dollar (USD) on Thursday, with GBP/USD reversing earlier losses as investors digested a mixed US inflation report that failed to shake expectations of a Federal Reserve (Fed) interest rate cut next week. At the time of writing, the pair is trading around 1.3540, recovering decisively from intraday lows near 1.3493.

The US Consumer Price Index (CPI) rose 0.4% MoM in August, beating the forecast of 0.3% and accelerating from 0.2% in July, driven largely by higher energy and shelter costs. On an annual basis, headline CPI held steady at 2.9%, in line with expectations but marking a notable uptick from 2.7% previously.

However, the Core CPI, which strips out food and energy prices and is more closely watched by the Fed, rose 0.3% MoM and 3.1% YoY, matching both forecasts and July's readings.

Despite the upside surprise in headline inflation, the stable core CPI print reinforced market expectations that the Fed will proceed with a 25 basis point rate cut at its monetary policy meeting next week. Recent dovish signals from Fed officials, coupled with softer labor market data and a weaker-than-expected Producer Price Index (PPI), have strengthened the case for policy easing.

Traders now see little justification for a more aggressive cut, especially with underlying inflation appearing contained. According to CME's FedWatch tool, the odds of a 25 basis point rate cut in December rose to 94%, up from 90% before the release. Traders also continue to fully price in three rate cuts by the end of 2025, reflecting confidence that the disinflation trend remains broadly intact.

Focus now turns to the Bank of England (BoE), which is set to announce its policy decision on September 18, just one day after the Fed. The BoE is widely expected to leave the Bank Rate unchanged at 4.00%, having already delivered five cuts earlier this year. The emerging policy divergence -- with the Fed moving toward easing while the BoE holds steady could offer near-term support to GBP/USD, as narrowing rate differentials work in Sterling's favor.