Pound Sterling strengthens against US Dollar ahead of UK CPI and Fed minutes

The Pound Sterling trades strongly above 1.2700 against the US Dollar ahead of UK inflation data.
UK inflation is forecasted to have declined sharply in April.
Fed officials continue to support higher interest rates for a longer period.

The Pound Sterling (GBP) remains firm, trading slightly above 1.2700 in Tuesday’s New York session. The next move in the GBP/USD pair will likely be guided by the United Kingdom Consumer Price Index (CPI) data for April and the Federal Open Market Committee (FOMC) minutes for the May meeting, which will be published on Wednesday.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges down to 104.50 as investors look for fresh cues about when the Federal Reserve (Fed) will start reducing interest rates. Investors await the FOMC minutes to get a deep understanding of policymakers’ views on the interest-rate outlook.

The impact of the FOMC minutes on markets could be light as the inflation outlook in the US has changed significantly since the last Fed meeting. Inflation declined as expected in April, signalling that the progress in the disinflation process has restarted after failing to do so during the January-March period. As the last Fed meeting was held before the release of the latest inflation print, the communication from Fed officials over interest rates is expected to be significantly hawkish.

Despite April’s decline in US inflation, Fed officials seem to still lack confidence that price pressures will sustainably return to the desired rate of 2%. On Monday, Fed Vice Chair for Supervision Michael Barr said that "Q1 inflation was disappointing, did not provide the confidence needed to ease monetary policy". Barr vowed for allowing more time for a tight policy stance to do its job.

Daily digest market movers: Pound Sterling rises while US Dollar turns subdued

The Pound Sterling edges higher but trades inside Monday’s trading range and holds the crucial support of 1.2700 against the US Dollar. The Pound Sterling performs strongly against all major currencies ahead of the UK CPI data for April.
Economists expect that the UK Office for National Statistics (ONS) will report a sharp decline in headline inflation to 2.1% from the prior reading of 3.2%. The core CPI, which strips off the more volatile items, is estimated to have decelerated to 3.6% from 4.2% in March. The monthly headline inflation is expected to have grown at a slower pace of 0.2% after a sharp increase of 0.6% in March.
The expected decline in UK inflation will increase investors’ confidence that price pressures are on course to return to the desired rate of 2%. This will boost expectations of early rate cuts by the Bank of England (BoE). Currently, investors have divided between the June or August meeting from when the BoE could start returning to policy normalization.
The expectations for the BoE to begin lowering interest rates in summer have strengthened, driven by a dovish communication from BoE Deputy Governor Ben Broadbent on the interest rate outlook. On Monday, Broadbent said: "If things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it's possible Bank Rate could be cut sometime over the summer," Reuters reported.

Technical Analysis: Pound Sterling stabilizes comfortably above 1.2700

The Pound Sterling extends its winning spell for the third trading session on Tuesday but prices hover inside Monday’s trading session, suggesting that investors await fresh triggers for further action. The GBP/USD pair advances to an almost two-month high near 1.2700. The Cable is expected to remain in the bullish trajectory as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, suggesting a strong uptrend. The Cable has retraced 61.8% of losses from March’s high around 1.2900.

The 14-period Relative Strength Index (RSI) has shifted into the bullish range of 60.00-80.00, suggesting that the momentum has leaned toward the upside.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

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