Market update: British pound near two-month high ahead of UK inflation data

The British pound held on near two-month highs against the United States dollar on Tuesday ahead of important news on inflation in the former’s home country due in the next session.

Official Consumer Price Index data for April comes up for release from the United Kingdom on Wednesday, and, if market expectations are met, it’s sure to be a market mover for the pound. The headline rate is tipped to relax to an annualised 2.1%, from the 3.2% seen in March. The ‘core’ rate, which removes the volatile effects of food and fuel prices, is expected to come in at 3.6%, down from the previous month’s 4.2%.

Markets think UK rates could start to come down from their inflation-busting peaks quite soon, with a June move by no means off the table even if August is favored. Expectation-matching numbers would probably keep that hope alive.

Central bank decisions and market sentiment

The Bank of England will next set rates on 20 June, and will see May’s inflation figures only a day before. Clearly, any surprise price weakness on Wednesday could increase market certainty that June will be the month and might reduce Sterling’s appeal.

The day will also bring the release of minutes from the Federal Reserve’s 1 May policy meeting. However, given the numerous opportunities to hear from Fed rate-setters since then and many more scheduled this week, these minutes may have been overtaken by subsequent events and may offer limited new trading cues.

Sterling has gained steadily on the dollar since April, thanks to some better news out of the UK economy and a general revival in risk appetite. Monetary policy comparisons still favor the greenback, however, with US borrowing costs likely to remain ‘higher for longer.’It’s not a stretch to worry that sterling might look a little overextended now.

GBP/USD technical analysis

Sterling has added nearly five US cents since it bounced back in late April. The previously dominant downtrend line from the peak of March 7 has been overcome by Sterling bulls whose next hurdle is March 20’s peak of 1.27884. If they can consolidate around that, then the psychological resistance of 1.28 will come into play.

Given GBP/USD’s sharp recent rise, it is perhaps a little surprising that the pair’s Relative Strength Index doesn’t more forcibly suggest overbuying. But it remains quite a way below the 70.00 level which would ring alarm bells.

Still, the rally looks overextended nevertheless, and IG’s own data suggests most traders are bearish at current levels. This need not mean a new downtrend is imminent, but it probably means that upside progress from current levels will be hard-won and subject to longer pauses for breath.

GBP/USD daily chart

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