In Wednesday’s London session, the Pound Sterling (GBP) corrected to 1.2750 against the US Dollar (USD) after reaching a fresh 10-week high at 1.2800 on Tuesday. The rally in the GBP/USD pair paused as concerns over the United Kingdom’s (UK) inflation outlook softened and the US Dollar (USD) regained some strength.
Softening UK Inflation Outlook
UK shop price inflation data from the British Retail Consortium (BRC) revealed significant easing in prices of both food and non-food items in May. Annual shop price changes grew by 0.6%, the slowest pace since November 2021, with food price inflation dropping for the 13th consecutive month to 3.2%. Retailers are passing on the benefits of lower prices to consumers, reflecting a softer inflation outlook.
A softer UK inflation outlook could heighten expectations of rate cuts by the Bank of England (BoE), which has maintained a restrictive interest rate stance since December 2021. Investors anticipate the possibility of policy normalization starting as early as the August meeting.
Market Sentiment Turns Cautious
The Pound Sterling dipped to 1.2750 against the US Dollar as market sentiment grew cautious. Uncertainty surrounds the appeal for risk-perceived assets amid expectations that the Federal Reserve (Fed) will delay interest rate reductions until the fourth quarter of the year. S&P 500 futures registered notable losses in the Asian session, indicating a risk-off sentiment, while the US Dollar Index (DXY) recovered to 104.70.
Traders adjusted their expectations for Fed rate cuts, with the probability of interest rate reductions in September declining to 44% from 58% a week ago. Minneapolis Fed Bank President Neel Kashkari stated that while the likelihood of further rate hikes is low, it has not been ruled out, emphasizing the need for significant progress in disinflation before considering rate cuts.
Focus on PCE Price Index Data
Investors will closely monitor the core Personal Consumption Expenditure Price Index (PCE) data for April, scheduled for release on Friday, to gauge the Federal Reserve’s interest rate outlook. Steady inflation growth could support expectations of interest rates remaining at elevated levels.
Technical Analysis: Pound Sterling Faces Resistance at 1.2800
The Pound Sterling encounters selling pressure near the round-level resistance of 1.2800. Despite near-term volatility ahead of the PCE data release, the Cable maintains a firm near-term outlook, supported by the 61.8% Fibonacci retracement level at 1.2670.
The GBP/USD pair is anticipated to continue its bullish trajectory, supported by upward-sloping Exponential Moving Averages (EMAs) across short to long-term periods. The 14-period Relative Strength Index (RSI) suggests bullish momentum with its shift into the range of 60.00-80.00.
