GBP/USD corrects to near 1.2350, upside seems favored on hopes of a smaller Fed rate hike

• GBP/USD is expected to conclude its corrective move to near 1.2350 as the risk-on impulse is rock solid.
• The odds of a 50 bps rate hike by the Fed have bolstered on soft US inflation report.
• UK’s headline CPI could rise surprisingly as the food price inflation has soared amid escalating food supply crisis.

The GBP/USD pair has corrected at a casual pace to near 1.2350 in the early Asian session after registering a fresh six-month high at 1.2444. The Cable is expected to rebound ahead as investors’ risk appetite is extremely solid after the release of soft US inflation data on Tuesday.

S&P500 displayed a juggernaut rally on Tuesday as lower-than-anticipated inflation data trimmed the risk of recession in the United States economy. Gains in the 500-stock basket of the US trimmed near settlement as anxiety among investors still sustain ahead of the interest rate decision by the Federal Reserve (Fed). However, the risk-on impulse is still solid and is expected to keep reins in the risk-sensitive assets.

The US Dollar Index has shown a fragile recovery after registering a fresh five-month low at 103.59. Less-confident recovery in the USD Index could get terminated amid a decline in safe-haven appeal. Soft US inflation data has accelerated hopes of a smaller and slower interest rate hike by the Fed, which has resulted in higher demand for US Treasury bonds. The 10-year US Treasury yields have dropped to 3.50%.

A note from Commerzbank dictates that “The 50 basis points hike, which is generally expected for tomorrow's FOMC meeting, can be considered almost certain after today's data.” We continue to assume that the Fed will reduce the size of the rate hikes again at the beginning of 2023, moving by only 25 bps in February and March.

On the United Kingdom front, investors have shifted their focus toward the inflation data. The annual Consumer Price Index (CPI) is expected to decline to 10.9% from the former release of 11.1% for November. While the core CPI is seen unchanged at 6.5%. UK’s headline CPI could display a surprise rise as the food price inflation has soared amid escalating food supply crisis.