Pound Sterling holds into gains on soft US Dollar ahead of US inflation

• The Pound Sterling jumps to 1.2600 amid uncertainty over BoE rate cuts and a soft US Dollar.
• Steady UK wage growth deepens fears of persistent inflationary pressures.
• The US Dollar is on the back foot ahead of crucial US inflation data for April.

The Pound Sterling (GBP) posts a fresh weekly high at the round-level resistance of 1.2600 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair holds strength as the US Dollar is on the back foot ahead of the United States Consumer Price Index (CPI) data for April, which will be published at 12:30 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, dips below the crucial support of 105.00.

Economists expect that monthly headline inflation grew at a steady 0.4%. The core CPI, which strips off volatile food and energy prices, is expected to have risen at a slower pace of 0.3% in April, from March’s reading of 0.4%. Annual headline CPI is forecasted to have softened to 3.4% from 3.5% in March. In the same period, core inflation is anticipated to have decelerated to 3.6% from the prior reading of 3.8%.

The inflation data will significantly influence speculation for the Federal Reserve (Fed) interest-rate cuts. Currently, financial markets expect that the Fed will choose the September meeting as the point to start lowering interest rates. Along with the inflation reading, investors will also focus on the monthly Retail Sales for April, an indicator of household spending which can also give clues about the inflation outlook. The Retail Sales data is estimated to have grown at a slower rate of 0.4% from a 0.7% increase in March. 

Daily digest market movers: Pound Sterling strengthens on multiple tailwinds

• The Pound Sterling extends its winning spell for the third trading session on Wednesday. The Cable capitalizes on the soft US Dollar and uncertainty over when the Bank of England (BoE) will opt for interest-rate cuts. Currently, investors anticipate that the central bank will start to do so from the June meeting.
• The United Kingdom Employment report for the three months ending March, which was released on Tuesday, indicated that job market conditions deteriorated for the third time in a row. Due to rising joblessness, the Unemployment Rate rose to 4.3% as expected. Historically, easing labor market conditions boost expectations for the central bank to adopt a dovish stance on interest rates. However, the impact of this loosened labor market was offset by steady wage growth.
• BoE policymakers remain concerned over high service inflation as it could stall progress in the disinflation process. Services inflation is majorly driven by wage growth, which appears to be significantly stronger than what is required for inflation to return to the desired rate of 2%. 
• After the labor market data, BoE Chief Economist Huw Pill commented: "Rates of pay growth remain quite well above what would be consistent for meeting the 2% inflation target sustainably." Pill emphasized the need to maintain a restrictive stance on monetary policy that continues to build downside pressure on domestic inflation. About rate cuts, Pill said that it is reasonable to believe that over the summer, “we will see enough confidence to consider lowering interest rates.”

Technical Analysis: Pound Sterling tests 1.2600

The Pound Sterling extends its upside to the crucial resistance of 1.2600. The GBP/USD pair climbs above the major resistance plotted from December 8 low of 1.2500. The near-term outlook of the Cable has improved as it seems well-established above the 20-day Exponential Moving Average (EMA), which trades around 1.2540. The asset has retraced 50% losses recorded from a 10-month high at around 1.2900.

The 14-period Relative Strength Index (RSI) gradually approaches the 60.00 barrier. A decisive break above this level will trigger bullish momentum.