Pound Sterling retreats from 1.2700 with focus on UK inflation and BoE policy outcome

• The Pound Sterling struggles near 1.2700 against the US Dollar amid uncertainty ahead of the UK inflation and the BoE interest rate policy.
• The UK headline CPI is expected to have decelerated to the bank’s target of 2% in May.
• Fed’s Harker sees only one rate cut this year if his economic forecast plays out.

The Pound Sterling (GBP) faces selling pressure in an attempt to extend recovery above the round-level resistance of 1.2700 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair edges down as the US Dollar rebounds after a modest correction from a six-week high. The US Dollar Index (DXY), which tracks the greenback’s value against six major currencies, holds gains above 105.00 as Federal Reserve (Fed) officials continue to argue in favor of cutting interest rates only once this year.

Fed policymakers want to see inflation decline for months to gain confidence in lowering interest rates. They remain concerned over a reacceleration in price pressures due to premature rate cuts even though the progress in the disinflation process has resumed after stalling in the first quarter of the year.

On Monday, Philadelphia Fed Bank President Patrick Harker emphasized keeping rates unchanged for now to maintain downward pressure on inflation in various sectors such as housing and services, notably auto insurance and repairs. On the interest rate outlook, Harker sees one cut in benchmark rates this year if his economic forecast plays out, Reuters reported.

On the economic front, investors will focus on the monthly United States (US) Retail Sales data for May, which will be published at 12:30 GMT. The Retail Sales data, a close measure of consumer spending that provides cues on the inflation outlook, is estimated to have increased by 0.3% after remaining flat in April.

Daily digest market movers: Pound Sterling is under pressure against the US Dollar ahead of US Retail Sales

• The Pound Sterling exhibits a mixed performance against major currencies amid uncertainty ahead of the United Kingdom (UK) Consumer Price Index (CPI) data for May, which is scheduled for Wednesday. The inflation data will provide cues about when the Bank of England (BoE) will start reducing interest rates.
• The UK CPI report is expected to show that the headline inflation has declined to BoE’s target of 2% from April’s reading of 2.3%. In the same period, the core CPI, which strips off volatile food and energy prices, is estimated to have decelerated to 3.5% from the former release of 3.9%. However, monthly headline inflation is expected to have grown at a higher pace of 0.4% from 0.3% in April.
• Investors will pay close attention to the service inflation data, which has remained a key reason for a bumpier path of inflation toward the central bank’s 2% target. Inflation in the service sector, which is mainly driven by wage growth, could remain persistent as the Average Earnings data Excluding bonuses for three months ending April – a key measure to wage growth – grew steadily by 6.0%. The pace at which wages are growing is much higher than what is needed to bring core inflation down to 2%.
• This week, the Pound Sterling is expected to remain highly volatile as the inflation data will be followed by the BoE’s interest rate policy decision, which will be announced on Thursday. The BoE is widely anticipated to keep interest rates unchanged at 5.25% for the seventh time in a row. Therefore, investors will look for cues about the future rate-cut timeframe. Currently, investors see a 57% chance of another BoE rate hold in August, Reuters reported.

Technical Analysis: Pound Sterling faces pressure near 1.2700

The Pound Sterling struggles to extend its recovery above the crucial resistance of 1.2700 against the US Dollar. The GBP/USD pair finds selling pressure near the 20-day Exponential Moving Average (EMA), suggesting that the near-term trend is uncertain. While the 50-day EMA near 1.2670 is acting as a major support for the Pound Sterling bulls.

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