GBP/USD EXTENDS ITS RECOVERY TO NEAR 1.2800 AMID MIXED SENTIMENT

GBP/USD recovers some lost ground below the 1.2800 mark.

Bank of England (BoE) Chief Economist Huw Pill said interest rate rises have begun to affect inflation.

Atlanta Federal Reserve (Fed) Governor Michelle Bowman stated that more rate hikes would be required to bring inflation to target.

Market players will closely watch the US inflation data, UK Gross Domestic Product (GDP) Q2 YoY.

The GBP/USD pair extended its recovery but holds below 1.2800 during the early Asian session on Tuesday. Meanwhile, the US Dollar Index (DXY), a measure of the value of the Greenback against a weighted basket of currencies used by US trade partners, remains sideways around 102.07.

The Bank of England (BoE) Chief Economist Huw Pill said on Monday that the central bank's interest rate rises have begun to affect inflation. He noted that there are risks on both sides of UK inflation, but he expects it to return to its target in the first half of 2025 and decrease to 5% by the end of the current year.

Additionally, Huw Pill also expects food price inflation in the United Kingdom to decline to approximately 10% later this year and to fall much more for the total Consumer Price Index (CPI) to return to its 2% target. Interest rates are expected to remain high for a longer period. However, the central bank will be more data-dependent, and policymakers will respond as the economy and the data evolve.

It’s worth noting that the Bank of England (BoE) raised interest rates by 25 basis points (bps) to a 15-year high of 5.25% from 5% in its August policy meeting last week. That said, the pessimistic economic outlook and the fear of recession in the UK exert pressure on the Pound Sterling and act as a headwind for the GBP/USD pair.

On the US Dollar front, Atlanta Federal Reserve (Fed) Governor Michelle Bowman indicated that additional rate hikes will likely be required to return inflation to target levels, per Reuters. Meanwhile, the President of the New York Fed, John C. Williams, anticipated that interest rates would continue to decline in the coming year.

Market participants will keep an eye on the inflation data later this week. The stronger than expected data could convince the Fed to maintain its hawkish stance and hike additional rates for the entire year. This, in turn, boosts the Greenback and weighs on the GBP/USD pair.

Moving on, market players will take cues from the US Consumer Price Index (CPI) and the Produce Price Index (PPI), due on Thursday and Friday, respectively. Market expectations anticipate a 0.2% monthly increase in CPI MoM for July. Also, the preliminary UK Gross Domestic Product Q2 YoY will be due on Friday. These data could provide hints for a clear direction in GBP/USD.