Pound Sterling rises after UK Inflation declines expectedly

• The Pound Sterling moves higher above 1.2700 as the UK inflation cools down further in line with expectations.
• UK service inflation remains sticky, which could restrict the BoE from committing rate cuts in the near term.
• Slower-than-expected US Retail Sales growth has limited the US Dollar upside.

The Pound Sterling (GBP) edges higher above the round-level resistance of 1.2700 on Wednesday after the United Kingdom (UK) Office for National Statistics (ONS) showed that price pressures declined as expected in May. UK’s annual headline inflation returned to the central bank’s target of 2% for the first time in more than three years from April’s reading of 2.3%. In the same period, the core Consumer Price Index (CPI), which excludes volatile food and energy prices, declined to 3.5% from the former reading of 3.9%.

Monthly headline inflation grew steadily by 0.3% but lower than estimates of 0.4%. The report also showed that the annual Producer Price Index (PPI) for Core Output grew significantly by 1.0% in May, compared with the 0.3% increase a month earlier.

In spite of a decline in the annual headline CPI to 2%, Bank of England (BoE) policymakers might not be comfortable with discussions on early rate cuts as annual service inflation barely decelerated. Inflation in the service sector grew by 5.9%, slightly lower than the prior release of 6.0%, but is almost double that which is needed to contain price pressures.

The next trigger for the Pound Sterling will be the BoE’s monetary policy decision, which will be announced on Thursday. The BoE is widely anticipated to keep the interest rate unchanged at 5.25%. Therefore, investors will focus on vote split and fresh cues about when the BoE will start reducing interest rates.

Daily digest market movers: Pound Sterling moves higher as UK service inflation barely declines

• The Pound Sterling strengthens against the US Dollar (USD) as UK service inflation grew by 5.9% year-over-year in May, slightly declining from 6.0%, but keeping broadly stubborn. Meanwhile, the US Dollar steadies after a modest correction led by slower-than-expected United States (US) monthly Retail Sales growth for May, which allowed financial markets to raise their bets for early rate cuts by the Federal Reserve (Fed). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds the crucial support of 105.00 after correcting from a fresh six-week high of 105.80.
• The US Census Bureau showed on Tuesday that Retail Sales missed estimates of 0.2% growth but increased an uptick of 0.1% in May after contracting by 0.2% in April, downwardly revised from 0%. Core Retail Sales excluding automobiles contracted steadily by 0.2%, deepening fears of a slower Q2 Gross Domestic Product (GDP). Core Retail Sales data is a key measure of consumer spending, which is a crucial component of GDP.
• Investors noticed that sales were hit by lower ticket sizes at service stations due to lower gasoline and motor vehicle prices, weak demand for building materials, and a decline in footprints at food services and drinking places. This suggests that households cut spending on discretionary items, which is generally the outcome of soft purchasing power due to higher inflation and interest rates.
• According to the CME FedWatch tool, 30-day Fed Funds futures pricing data suggest two interest rate cuts this year against only one signaled by Fed policymakers in their latest interest rate projections. Investors see the Fed reducing interest rates twice this year as a soft US inflation report for May indicated that the progress in the disinflation process has resumed.
• On Tuesday, Dallas Fed Bank President Lorie Logan said the latest inflation figures showing that price pressures are cooling is welcome news. However, policymakers need to see more good data before considering rate cuts.

Technical Analysis: Pound Sterling recovers further above 1.2700

The Pound Sterling extends its recovery above 1.2700 on sticky UK service inflation data. The GBP/USD pair rises to near the 20-day Exponential Moving Average (EMA) at 1.2720, though the near-term trend is still uncertain. 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.