GBP/USD remains on the defensive above 1.2550 ahead of UK GDP, US Retail Sales data

• GBP/USD recovers some lost ground around 1.2568 on the downbeat UK CPI data. 
• Fed officials are anticipated to maintain a cautious approach as they further evaluate the trajectory of inflation in the coming months.
• The UK Consumer Price Index (CPI) increased by 4% year-on-year in January, worse than the market expectation of 4.2%.
• Traders will closely monitor the UK Gross Domestic Product (GDP) for Q4 and US Retail Sales, due on Thursday. 

The GBP/USD pair remains on the defensive above the mid-1.2500s during the early Asian trading hours on Thursday. The pair bounces off the low of 1.2535, but the upside is likely to be limited, backed by the softer UK inflation data. Investors will shift their attention to the UK GDP growth numbers for the fourth quarter (Q4), due on Thursday. At press time, the major pair is trading at 1.2568, gaining 0.03% on the day. 

The hotter-than-expected US inflation data last week convinced market players that the journey to inflation normalization will be long. Fed officials are expected to maintain a cautious approach as they further evaluate the trajectory of inflation in the coming months. Fed Vice Chair for Supervision Michael Barr said that the Fed remains confident that US inflation is on the way to hitting the central bank’s 2% target. However, Barr emphasizes the necessity of further positive data before advocating interest rate cuts. 

The UK Consumer Price Index (CPI) rose by 4% year-on-year in January, worse than the market expectation of 4.2%. Month-on-month, the headline CPI dropped 0.6% MoM in January from a rise of 0.4% in December. Finally, the Core CPI, excluding volatile food and energy prices, climbed 5.1% YoY in January, below the market consensus of 5.2%. 

The Bank of England (BoE) Governor Andrew Bailey said that downbeat inflation in January pretty much leaves us where we were after the data prompted traders to shift forward bets on interest-rate cuts. Bailey added that the central bank is on pace to achieve inflation targets, and inflation is expected to come down to target by spring. Investors are now pricing in nearly 40% odds that the BoE will cut the interest rate to 5.0% at its June meeting, down from 60% before stronger-than-expected US inflation data reverberated through global financial markets.

Market participants will monitor the UK Gross Domestic Product (GDP) for Q4, which is forecast to expand by 0.1% YoY. Also, the UK Industrial Production and Trade Balance will be due on Thursday. On the US docket, the Retail Sales, Philly Fed Manufacturing Index, Industrial Production, and weekly Initial Jobless Claims will be released later on Thursday.