GBP/USD is defending 1.2600 after mixed UK GDP and Industrial Production data releases. The US Dollar steadies amid jittery markets, anticipating the Fed rate pause announcement following soft US inflation data.
GBP/USD lost more than 50 pips on Monday but gathered bullish momentum early Tuesday. The pair could stretch higher toward 1.2600 later in the day in case May inflation data from the US causes the US Dollar (USD) to stay under selling pressure.
In the absence of high-tier data releases on Monday, GBP/USD came under technical bearish pressure as markets reacted to overbought conditions.
Pound Sterling, however, attracted buyers in the European morning on Tuesday. Wage inflation in the UK, as measured by Average Earnings Excluding Bonus, climbed to 7.2% on a yearly basis in April from 6.8% in March, the Office for National Statistics reported. With this reading surpassing the market expectation of 6.9%, hawkish Bank of England (BoE) bets started to dominate the market action, providing a boost to GBP/USD. At the time of press, the 2-year UK gilt yield was up more than 10 basis points on the day at 4.75%.
In the second half of the day, the Consumer price Index (CPI) data for May will be watched closely by market participants ahead of the Federal Reserve’s policy announcements on Wednesday.
The monthly Core CPI, which excludes prices for volatile items and is not distorted by the base effect, is expected to rise 0.4% in May. With a smaller-than-forecast increase, markets could continue to price in a no change in the Fed’s policy rate and highlight the policy divergence between the Fed and the BoE, allowing GBP/USD to stretch higher. On the flip side, a reading at or above 0.5% should help the USD to turn resilient against its peers and cap GBP/USD’s upside
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