• GBP/USD recovers following UK inflation data release as the US Dollar weakens.
• Fed Chair Jerome Powell’s comments on rate hikes keep investors nervous, though fails to weigh on the GBP/USD.
• BoE is expected to raise rates by 25 bps to 4.75% in the coming decision, with a possibility of a 50 bps increase.

GBP/USD recovered some ground following the release of inflation data in the United Kingdom (UK), which initially underpinned the GBP/USD. Nevertheless, it reversed its gains, as investors doubted the Bank of England (BoE) could tame inflation without damaging the economy. The GBP/USD trades at 1.2773, above its opening price after hitting a daily low of 1.2689.

Pound Sterling gains amid investor anticipation for potential rate hike

A risk-off impulse keeps Wall Street pressured as the Federal Reserve Chairman Jerome Powell commenced its two-day testimony in the US Congress. Powell commented that the US central bank would continue to raise rates, despite reducing growth, to contain stubbornly high inflation.

Moreover, Jerome Powell added that the decisions would be taken meeting-by-meeting based on incoming data and that “it may make sense to move rates higher, at a moderate pace.”

GBP/USD traders should be aware of last week’s Fed’s decision to keep rates unchanged at 5.00%-5.25%. However, officials upward revised peak rates above the 5.50% threshold, which seems to be seen as too high according to CME FedWatch Tool data. Odds for a 25 bps Fed rate hike at the July meeting are 74.4%, but investors are not foreseeing rates past the 5.25%-5.50% range.

Meanwhile, UK consumer inflation data rose by 8.7% YoY in May, unchanged from April’s data, though exceeded estimates of 8.4%. Core inflation, which excludes volatile items, expanded by 7.1% YoY, above forecasts of 6.8%, putting pressure on the Bank of England (BoE) to take measures to curb inflation.

On Thursday, the BoE is expected to raise rates by 25 bps to 4.75%. However, the latest round of inflation data augmented expectations the BoE could raise rates by 50 bps, as money markets odds lie at a 50% chance of a half-point rise