The Pound Sterling (GBP) is flat against the US Dollar (USD) around 1.3500 in Wednesday’s European session as market participants take a cautious approach ahead of the upcoming United States Consumer Price Index (CPI) release for May. The Greenback has taken an undetermined direction, while the UK provided soft labour market data, resulting in increased expectations that the Bank of England (BoE) could enact its first rate cut in August.
The GBP/USD couple had a brief recovery from earlier losses, however, it has since stabilised against the DXY which continues to consolidate around 99.00. Investors seemed keen to avoid taking any strong directional views ahead of an important CPI print, which could either lead or follow a significant shift in the Federal Reserve’s planned trajectory.
US CPI in Focus
The upcoming US CPI report, scheduled for 12:30 GMT, is expected to show a moderate rise in inflation.
- Headline inflation (YoY) is forecast to rise to 2.5% in May from 2.3% in April.
- Core CPI, excluding food and energy, is expected to edge up to 2.9% from 2.8%.
- Every month, CPI and Core CPI are projected at 0.2% and 0.3%, respectively.
A higher-than-expected inflation print may reaffirm the Fed’s hawkish hold, especially amid ongoing uncertainty around President Donald Trump’s trade and tariff policy. However, even if inflation underwhelms, Fed officials may resist easing interest rates due to concerns over de-anchoring consumer expectations under the current administration.
Weak UK Labour Market Weighs on Pound Sentiment
Unpleasant UK employment data released at the outset of the week curbed the Pound. As per the Office for National Statistics (ONS), the unemployment rate rose to 4.6% in the three months to April, the highest it has been since July 2021.
Part of the slowdown in the labour market is due to chancellor Rachel Reeves’ decision to raise social security contributions from employers from 13.8% to 15% in April, which would have robbed every employer of any enthusiasm to recruit.
Meanwhile, wage growth was lacklustre, reinforcing the argument that inflationary pressures in the UK are coming under control.
Global Mood Improves as US-China Tensions Ease
Adding a supportive backdrop for risk assets, trade tensions between the US and China showed signs of easing after a two-day meeting in London between top trade officials. US Secretary of Commerce Howard Lutnick noted progress, including the potential rollback of some export restrictions, which improved overall market sentiment and capped safe-haven USD demand.
UK Data and US CPI to Guide GBP/USD
While the Pound remains underpinned by easing global tensions, its near-term direction hinges on two key catalysts:
- The US CPI release later today
- Upcoming UK data on monthly GDP, manufacturing, and industrial production, all due Thursday
Markets expect the UK economy to have shrunk by 0.1% in April, after posting a 0.2% expansion in March. Weak production numbers could further validate the BoE’s dovish shift, potentially dragging the Pound lower in the coming sessions.
GBP/USD Caught Between Central Bank Divergence and Global Sentiment
The GBP/USD pair appears trapped in a narrow range, balancing Fed hawkishness with BoE’s dovish tilt. A hotter US inflation report may lift the Dollar and weigh on the Pound, while weak UK growth and labour metrics continue to feed August rate cut speculation.
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