GBP/USD retreats from one-week high, up little around mid-1.3200s ahead of US data/FOMC

• GBP/USD shot to over a one-week high in reaction to hotter-than-expected UK CPI.
• Omicron fears, reduced BoE rate hike bets held back bulls from placing fresh bets.
• Hawkish Fed expectations underpinned the USD and capped the upside for the pair.

The GBP/USD pair maintained its bid tone through the mid-European session, albeit has retreated a few pips from over one-week high touched earlier this Wednesday. The pair was last seen trading around mid-1.3200s, up only 0.10% for the day.

The pair gained strong positive traction following the release of hotter-than-expected UK consumer inflation figures and built on the previous day's modest bounce from sub-1.3200 levels. In fact, the headline CPI climbed 0.7% MoM in November and accelerated to 5.1% YoY from 4.2% previous. This was well above consensus estimates and the fastest rise since September 2008. Adding to this, core CPI also surpassed expectations and jumped 4% YoY and provided a goodish lift to the British pound.

Investors, however, remain uncertain about the economic recovery in the short term amid the rapid spread of the Omicron variant of the coronavirus. This, along with the imposition of fresh COVID-19 restrictions, did little to revive hopes for an imminent interest rate hike by the Bank of England and acted as a headwind for the British pound. Apart from this, the underlying bullish tone around the US dollar kept a lid on any further gains for the GBP/USD pair, at least for the time being.

The greenback continued drawing some support from growing market acceptance that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. The money markets have been pricing in the possibility for an eventual liftoff by June 2022 and another rate hike as early as November. Apart from this, the prevalent cautious market mood further benefitted the greenback's safe-haven status and led to the GBP/USD pair's intraday pullback of around 30 pips.

Market participants now look forward to the November US monthly Retail Sales data for some short-term trading impetus. The key focus, however, will be on the outcome of a two-day FOMC monetary policy meeting, due to be announced later during the US session. The Fed's strategy on interest rate hikes will influence the near-term USD price dynamics. This, along with the BoE monetary policy decision on Thursday will determine the next leg of a directional move for the GBP/USD pair.

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