GBP/USD remains below 1.3650 ahead of UK CPI data

• GBP/USD holds losses ahead of the release of UK inflation and Retail Price Index data.
• The US Dollar may face challenges as the Fed is widely expected to deliver a 25-basis-point rate cut on Wednesday.
• The likelihood of multiple Fed rate cuts this year strengthens after upbeat US Retail Sales data.

GBP/USD loses ground after two days of gains, trading around 1.3640 during the Asian hours on Wednesday. The Pound Sterling (GBP) inches lower against the US Dollar (USD) ahead of the United Kingdom's (UK) Consumer Price Index (CPI) and Retail Price Index data. Focus will shift toward the US Federal Reserve (Fed) policy decision due later in the day.

The UK Consumer Price Index report is expected to show that headline inflation rose to 3.9% year-over-year in August from 3.8% prior. Meanwhile, the monthly inflation is expected to reach 0.3% from 0.1%. Signs of inflationary pressures accelerating would boost hopes that the Bank of England (BoE) will keep interest rates on hold at 4% on Thursday.

The GBP/USD pair may regain its ground as the US Dollar (USD) could weaken amid rising likelihood of multiple Federal Reserve (Fed) interest rate cuts, with strong retail sales and labor data outweighing hotter inflation. Additionally, Morgan Stanley and Deutsche Bank projected 25-basis-point reductions at each of the Fed's meetings in September, October, and December.

US Retail Sales increased by 0.6% month-over-month in August, following the 0.6% increase (revised from 0.5%) recorded in July, and came in better than the market expectation of 0.2%. Retail Sales Control Group and Retail Sales ex Autos both rose 0.7%, against the expected 0.4% increase. The sales report showed resilient consumer spending despite sticky inflation and a softening labor market.

The CME FedWatch tool suggests that markets are fully priced in that the Fed will cut the interest rates by 25 basis points (bps) on Wednesday, the first reduction since December. The Fed's Summary of Economic Projections (SEP), the 'dot plot,' will be eyed, where each member of the Federal Open Market Committee (FOMC) expects the federal funds rate in the near future.