• Sterling is falling amid selling pressure near 1.2800 due to a number of unfavorable factors.
• The UK’s benign inflation outlook could prompt the BoE to start easing higher interest rates.
• The US dollar is recovering amid uncertainty over the underlying US PCE price index.

The pound sterling (GBP) corrects to 1.2750 against the US dollar (USD) during Wednesday’s London session after hitting a fresh 10-week high of 1.2800 on Tuesday. The GBP/USD rally is decelerating as the UK inflation outlook deteriorates and the US dollar (USD) exits.

UK store price inflation data from the British Retail Consortium (BRC) showed that food and non-food prices fell significantly in May. Annual price changes at high street UK retailers rose 0.6%, the slowest since November 2021, compared with the previous reading of 0.8%. Food price inflation fell for the 13th month in a row, to 3.2% from 3.4% in April. The agency noted that retailers are passing on the benefits of lower prices to consumers.

A softer inflation outlook in the UK would raise expectations of interest rate cuts by the Bank of England (BoE), which has maintained a restrictive interest rate stance since December 2021. Currently, investors expect that the BoE may operate the August meeting as the earliest moment to decide to start the policy normalization process.

Daily Market Roundup: Sterling Falls as Fed Kashkari Considers Interest Rate Hike

• Sterling falls to 1.2750 against the US dollar as market sentiment turns cautious. The attractiveness of perceived risk assets has become uncertain as investors expect the Federal Reserve (Fed) will not start cutting interest rates until the fourth quarter of the year. S&P 500 futures recorded significant losses during the Asian session, reflecting a risk-free market sentiment. The US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, recovers to 104.70
• Traders realized their assumptions that the Fed would start reducing borrowing costs from current levels at its September meeting. The reason investors are pulling back on their bets is that Fed policymakers want price pressures to subside for many months before considering interest rate cuts.
• CME’s FedWatch tool shows the likelihood of interest rates falling from their current levels in September has fallen to 44% from 58% recorded a week ago. On Tuesday, Minneapolis Fed Bank President Neel Kashkari said the possibility of further interest rate increases is quite low but has not been taken off the table. Kashkari emphasized that the Fed should wait for significant progress in disinflation before moving to interest rate cuts.
• This week, investors will focus on core consumer spending price index (PCE) data for April, which will be released on Friday, for fresh information on the Federal Reserve’s interest rate outlook. The Fed’s preferred measure of inflation is estimated to have continued to rise on a monthly and annual basis, by 0.3% and 2.8%, respectively. A steady raise in inflation will suggest the likelihood of interest rates remaining at higher levels.

Technical Analysis: Pound Sterling corrects from 1.2800

Sterling is facing selling pressure near the circular resistance at 1.2800. GBP/USD is expected to remain volatile ahead of the release of the Fed’s preferred inflation gauge on Friday. However, the near-term outlook for Cable remains unchanged as it maintains a 61.8% Fibonacci retracement (plotted from the March 8 high at 1.2900 to the April 22 low at 1.2300) at 1.2670.

Cable is expected to continue its bullish trajectory as all brief and long-term exponential moving averages (EMAs) are moving higher, suggesting a forceful uptrend.

The 14-period Relative Strength Index (RSI) has moved to a bullish range of 60.00-80.00, suggesting that momentum has tilted toward the upside.