GBP/USD rallied to a one-year high of 1.2679 on Wednesday after data showed U.S. headline CPI fell below forecasts to a 2-year low, ramping up Fed rate-cut expectations and boosting sterling ahead of an expected 25bp BoE hike on Thursday and further UK tightening into Q4.

The CPI removed virtually any expectation of a further Fed hike in 2023, weighing broadly on the dollar, even after Chair Jerome Powell warned that the U.S. central bank still had a long way to go to bring down inflation.

The question for Fed watchers appears to be when the U.S. central bank will start cutting and by how much.

GBP/USD bulls appeared to be adding to recent longs, with expectations of UK-U.S.
rate divergence fueling expectations of more sterling gains.

Risks for sterling bulls abound, including that the Fed could keep rates high for longer in H2 rather than cutting aggressively.
There is also the risk that UK inflation, currently at 10.1%, begins to recede, allowing BoE doves to gain more influence, diminishing hawkish rate expectations.

Under current conditions, with UK rates moving higher and U.S. rate expectations falling, GBP/USD bulls will target 100/55/200-WMA resistance from 1.2711 to 1.2871.

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