The Pound Sterling (GBP) surged above the 1.2700 resistance level on Wednesday, following the release of UK inflation data for May. While headline inflation fell to the Bank of England’s (BoE) 2% target, sticky service sector inflation raised doubts about the central bank’s willingness to cut interest rates prematurely.
UK Inflation Cools, But Service Sector Remains Stubborn
The UK’s annual headline inflation eased to 2%, but core inflation, excluding volatile food and energy prices, remained elevated at 3.5%. Notably, service sector inflation, a key focus for the BoE, only slightly decelerated to 5.7%, nearly double the target rate.
This resilience in service sector inflation could deter the BoE from considering early rate cuts, despite the headline inflation figure hitting the target.
Market Focus Shifts to BoE Decision
Investors are now eagerly awaiting the BoE’s monetary policy decision on Thursday. While no change in interest rates is expected, market participants will be closely watching the vote split and any hints about the timing of potential rate cuts.
Market Drivers: UK Inflation and Fed Rate Cut Bets
- Sticky UK Service Inflation: The persistent strength in service sector inflation could push back expectations for BoE rate cuts.
- Softer US Retail Sales: Weaker-than-expected US retail sales data has fueled speculation of Fed rate cuts, putting downward pressure on the US Dollar.
- Fed’s Dot Plot: Investors will be scrutinizing the Fed’s updated projections for interest rates, looking for clues about the timing and magnitude of potential rate cuts.
Technical Analysis: GBP/USD Recovers from Fibonacci Support
The GBP/USD pair has rebounded from the 61.8% Fibonacci retracement support level at 1.2667 and is now challenging the 20-day Exponential Moving Average (EMA) at 1.2720. However, the near-term trend remains uncertain, with the 50-day EMA at 1.2670 acting as a crucial support level.
The 14-period Relative Strength Index (RSI) has returned to the neutral 40.00-60.00 range, suggesting a fading of the recent upward momentum.
