Pound Sterling nears annual high at 1.2870 on strong UK GDP, BoE rate-cut bets fade

• The Pound Sterling performs strongly against the US Dollar and other currencies on faster UK GDP growth and a decline in BoE rate-cut prospects.
• The UK economy expanded at a faster pace of 0.4% in May, beating an estimate of 0.2%.
• Investors await the US inflation data for fresh guidance on the Fed's interest rates path.

The Pound Sterling (GBP) rallies to near 1.2870 and approaches the year-to-date high against the US Dollar (USD) in Thursday’s London session. The GBP/USD pair strengthens due to multiple tailwinds, such as weakness in the US Dollar due to firm speculation that the Federal Reserve (Fed) will begin reducing interest rates in September and an upbeat outlook for the British currency amid easing Bank of England’s (BoE) early rate cut bets and strong United Kingdom (UK) Gross Domestic Product (GDP) report for May.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back after failing to extend recovery above the immediate resistance of 105.20.

The Greenback comes under pressure as Fed Chair Jerome Powell signalled some disinflation progress in his semi-annual Congressional testimony comments. Powell refrained from announcing a victory over inflation but assured that policymakers are very focused on the path toward price stability.

In Thursday’ session, investors will keenly focus on the United States (US) Consumer Price Index (CPI) for June, which will provide cues about potential market expectations for Fed rate cuts in September. Economists expect that the core inflation, which excludes volatile food and energy items, grew steadily by 0.2% and 3.4% on monthly and annual basis, respectively. Annual headline inflation is estimated to have decelerated to 3.1% from May’s reading of 3.3%, while the monthly figure is expected to have grown by 0.1% after remaining unchanged previously.

Daily digest market movers: Pound Sterling outperforms US Dollar ahead of US Inflation

• The Pound Sterling outperforms its major peers on Thursday as the UK economy grew at a faster pace in May and the maintenance of a hawkish stance by BoE policymakers. UK’s Office for National Statistics (ONS) has reported that the economy expanded strongly by 0.4% from the estimates of 0.2% and a stagnant performance recorded in April.
• The UK ONS also showed that monthly Industrial and Manufacturing Production grew in line with expectations after contracting in April, while annual figures missed estimates. Monthly Industrial and Manufacturing Production rose by 0.2% and 0.4%, respectively. Annually, Industrial and Manufacturing Production grew at a slower pace of 0.4% and 0.6%, respectively. The factory data has returned to a positive trajectory after contracting at a stronger pace in April, suggesting a strong recovery in the domestic and overall demand for factory products.
• Meanwhile, Bank of England (BoE) policymakers have pushed back expectations of rate cuts in August. On Wednesday, BoE policymaker Catherine Mann warned that the decline in annual headline inflation to the 2% target was merely a “touch and go”. Mann added that price pressures could rise again and remain above the required rate for the rest of the year. She indicated that her stance would remain hawkish until she sees a sustained decline in service inflation and wage growth.

• This week, BoE policymaker Jonathan Haskel also maintained hawkish guidance on interest rates due to sticky wage growth. Haskel said: "I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably", Reuters reported.

Technical Analysis: Pound Sterling close to 52-week high near 1.2870

The Pound Sterling approaches a fresh annual high against the US Dollar near 1.2870. The GBP/USD pair is expected to extend its upside as it is on the verge of an inverted Head and Shoulder (H&S) breakout. The neckline of the above-mentioned chart pattern is plotted near 1.2850, and a breakout of the H&S formation results in a bullish reversal.

Advancing 20-day Exponential Moving Average (EMA) near 1.2747 suggests that the near-term trend is bullish.

The 14-day Relative Strength Index (RSI) established into the bullish range of 60.00-80.00, indicating that the momentum has leaned to the upside.