GBP/USD drops to mid-1.4100s ahead of the key US inflation data

• A broad-based USD strength prompted selling around GBP/USD on the last day of the week.
• The upbeat UK economic outlook, BoE Vlieghe’s hawkish comments might help limit losses.
• The market focus remains on the Fed’s preferred inflation gauge, Biden’s budget proposal.

The intraday USD buying picked up pace during the mid-European session and dragged the GBP/USD pair to fresh daily lows, around the 1.4155-50 region.

The continued with its struggle to find acceptance above the 1.4200 round-figure mark and witnessed some selling on the last trading day of the week. The pullback was exclusively sponsored by a resurgent US dollar demand and forced the GBP/USD pair to erase a part of the previous day's strong gains.

Following the previous day's brief pause, the greenback regained traction on Friday and built on this week's bounce from the lowest level since January. The momentum was supported by the overnight surge in the US Treasury bond yields, triggered by reports about the Biden administration’s multi-trillion spending plan.

According to the New York Times, US President Joe Biden will announce a $6 trillion budget for the fiscal year 2022. This fueled optimism over the economic recovery and stoked worries about rising inflationary worries, which raised speculations that the Fed would tighten its monetary policy sooner rather than later.

Hence, the key focus will remain on Friday's release of the Fed's preferred inflation gauge – the core PCE Price Index. A stronger print will validate the higher inflation narrative and Fed rate hike expectations, which should trigger a fresh bout of short-covering around the greenback and exert some additional pressure on the GBP/USD pair.

That said, the Bank of England policymaker Gertjan Vlieghe's hawkish comments on Thursday, saying that the central bank could raise rates well into next year, should act as a tailwind for the British pound. Vlieghe also noted that an increase could come earlier if there is a smooth transition from furlough and the economy rebounds more quickly than expected.

The comes on the back of the optimistic outlook for the UK economic recovery from the pandemic, reinforced by the impressive pace of vaccinations and the gradual easing of lockdown measures. In fact, UK Prime Minister Boris Johnson said that there is nothing in the data currently to delay the plan to end restrictions fully on June 21.

The domestic factors support prospects for the emergence of some dip-buying around the sterling and should help limit the downside. Even from a technical perspective, the GBP/USD pair has been showing some resilience below the 1.4100 mark, making it prudent to wait for some strong follow-through selling before placing fresh bearish bets.

Technical levels to watch