GBP/USD moves above 1.2700 due to rising odds of a Fed rate cut in September

• GBP/USD edges higher due to the rising expectations of a 50-basis point rate cut by the Fed in September.
• CME FedWatch tool indicates 67.5% odds of a 50-basis point Fed rate cut in September, up from 13.2% last week.
• The British Pound may struggle due to rising odds of a quarter-basis point rate cut by the BoE in August.

GBP/USD retraces its recent losses, trading around 1.2710 during the Asian session on Wednesday. This upside could be attributed to the tepid US Dollar (USD) following the rising expectations of a more aggressive rate cut starting in September after the weaker US employment data in July raised the fear of a looming US recession.

According to the CME FedWatch tool, there is now a 67.5% probability of a 50-basis point (bps) interest rate cut by the US Federal Reserve (Fed) in September, up from 13.2% a week earlier.

According to Reuters, Federal Reserve Bank of San Francisco President Mary Daly noted on Monday that “risks to the Fed's mandates are becoming more balanced and that there is openness to the possibility of cutting rates in upcoming meetings.” Additionally, Chicago Fed President Austan Goolsbee stated that the central bank is prepared to act if economic or financial conditions worsen.

Across the pond, the Pound Sterling (GBP) faced challenges as the Bank of England (BoE) implemented a widely anticipated 25-basis point rate cut at its August meeting. Additionally, market expectations now include the possibility of two further quarter-point rate cuts by the BoE by December.

The British Pound's upside potential could be limited by a general risk aversion. Concerns about escalating Middle East conflicts were heightened after Iran-backed Hezbollah launched dozens of missiles at Israel in response to the assassination of Hamas leader Ismail Haniyeh by an Israeli airstrike in Tehran.