GBP/USD spikes to one-week highs and retreats, steadies near mid-1.3400s post-UK CPI

• GBP/USD attracted some dip-buying on Wednesday and jumped to one-week tops.
• Hotter-than-expected UK CPI reassured BoE rate hike and provided a goodish lift.
• Hawkish Fed expectations should underpin the USD and cap gains amid Brexit woes.

The GBP/USD pair shot to one-week highs, around the 1.3470-75 region in reaction to hotter UK consumer inflation figures, albeit quickly retreated a few pips thereafter. The pair was last seen trading just above mid-1.3400s, still up around 0.25% for the day.

Having shown some resilience below the 1.3400 mark on Wednesday, the GBP/USD pair attracted fresh buying amid some US dollar profit-taking from a 16-month peak. The intraday buying picked up pace following the release of stronger UK CPI print, which surpassed expectations and accelerated to a 4.2% YoY rate in October.

This comes on the back of Tuesday's mostly upbeat UK employment figures and reinforced the case for an immediate 15bps rate hike in December by the Bank of England. This, in turn, was seen as a key factor that provided a goodish lift to the GBP/USD pair, though Brexit woes acted as a headwind for the sterling and cap gains.

Investors remain worried that the UK government could trigger Article 16 and suspend parts of the Northern Ireland Protocol. Apart from this, expectations for an early policy tightening by the Fed should limit the USD downfall. The combination of factors would keep a lid on any meaningful upside for the GBP/USD pair.

Market participants now look forward to the US housing market data – Building Permits and Housing Starts – due later during the early North American session. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and produce some trading opportunities around the GBP/USD pair.

Technical levels to watch