GBP/USD retreated on Wednesday after unexpectedly strong U.S. CPI but divergence between the Fed and markets over the direction the data's implications clouded sterling's outlook.
Fed vice chair Richard Clarida followed the data with dovish comments. Rising inflation came as little surprise after earlier Fed warnings about pandemic base effects, though the scale of the increase may have caught some off guard.
While Fed officials will continue to downplay near-term inflation increases as transitory, the market priced in a hike more aggressively, with U.S. Eurodollar futures slipping 6-10 bps from December 2022 to June 2025, projecting a full 25bps rise by December 2022.
A non-transitory inflation increase could boost the dollar -- and cap cable gains -- if it triggers a Fed response, but Wednesday's upbeat UK Q1 GDP and output data supports further sterling gains, as pandemic and Brexit-related weakness ebb.
However, if the U.S. recovers in lock step with the UK, GBP/USD's resurgence to pre-Brexit levels above 1.50 may be delayed.
(Paul Spirgel is a Reuters market analyst. The views expressed are his own) ((Paul.Spirgel@thomsonreuters.com))
