Pound Sterling weakens amid uncertainty ahead of UK inflation and BoE outcome

• The Pound Sterling remains vulnerable around 1.2670 as investors turn cautious ahead of the UK inflation for May and the BoE’s policy outcome.
• UK’s headline inflation is expected to come lower at the central bank’s target of 2%.
• Fed’s Kashkari sees only one rate-cut move this year despite progress in disinflation has resumed.

The Pound Sterling (GBP) continues its losing streak for the third trading day against the US Dollar (USD) on Monday. The GBP/USD pair hovers near a monthly low at around 1.2670 as the Federal Reserve’s (Fed) hawkish outlook on interest rates keeps the US Dollar’s appeal firm.

This weekend, Minneapolis Fed Bank President Neel Kashkari said in an interview with CBS that it's a "reasonable prediction" that the United States (US) central bank will cut interest rates once this year, waiting until December to do it.

Contrary to the Fed’s support for reducing interest rates only once this year, financial markets speculate that the Fed will deliver two rate cuts and start unwinding its restrictive policy framework from the September meeting, with subsequent rate cuts in the November or December meeting. The soft US Consumer Price Index (CPI) and Producer Price Index (PPI) reports for May have prompted higher expectations for early rate cuts.

On Friday, Chicago Fed Bank President Austan Goolsbee acknowledged that cooler consumer and producer inflation reports for May had relieved him. However, he wants to see similar data for months before lowering interest rates. Goolsbee advocated for reducing interest rates only once this year.

Daily digest market movers: Pound Sterling remains vulnerable ahead of key UK events

• The Pound Sterling exhibits a poor performance against all major currencies amid uncertainty ahead of the United Kingdom (UK) Consumer Price Index (CPI) data for May and the Bank of England’s (BoE) interest rate policy, which are scheduled for Wednesday and Thursday, respectively.
• Economists expect the UK Office for National Statistics (ONS) to report a sharp decline in the core CPI, which strips off the more volatile items, to 3.5% from 3.9% in April. The headline inflation is expected to return to the central bank’s target of 2.0% from the prior reading of 2.3%. Investors will keenly focus on service inflation, which has been a major barrier to the BoE’s move towards policy normalization.
• The expected decline in UK inflation will increase investors’ confidence that price pressures will stabilize near the desired rate. This will boost expectations of early rate cuts by the Bank of England (BoE). For June’s policy meeting, the BoE is expected to leave interest rates unchanged at 5.25%. Investors will pay close attention to the vote split and fresh cues on the interest rate outlook.
• In the last policy meeting, BoE Deputy Governor Dave Ramsden joined policymaker Swati Dhingra and voted for lowering interest rates by 25 basis points (bps) to 5.0%. Currently, investors remain split between August or September meetings from when the BoE could start reducing interest rates.

Pound Sterling Price Today:

Technical Analysis: Pound Sterling declines to 50-day EMA

The Pound Sterling trades inside Friday’s trading range amid caution ahead of UK inflation data and BoE monetary policy meeting. The GBP/USD pair struggles to sustain above the 61.8% Fibonacci retracement support (plotted from the March 8 high of 1.2900 to the April 22 low at 1.2300) at 1.2667.

The Cable has declined to near the 50-day Exponential Moving Average (EMA), which trades around 1.2670, suggesting that the near-term outlook is uncertain.

The 14-period Relative Strength Index (RSI) falls back into the 40.00-60.00 range, indicating that the upside momentum has faded.