GBP/USD tests 1.2600 on BoE’s “Super Thursday”

GBP/USD is holding lower near 1.2600, retreating from near 1.2650 heading into the European open. The cautious mood ahead of the BoE monetary policy decision is keeping Pound Sterling bulls at bay. Meanwhile, the US Dollar is struggling following softer US CPI.

GBP/USD continues to trade within the lower half of the ascending regression channel. The Relative Strength Index (RSI) indicator on the four-hour chart stays near 50, highlighting the lack of directional momentum.

On the downside, 1.2600 (psychological level) aligns as interim support ahead of 1.2565 (50-period Simple Moving Average (SMA) on the four-hour chart, lower limit of the ascending channel). A four-hour close below the latter could attract sellers and cause GBP/USD to decline toward 1.2500 (psychological level, 100-period SMA).

First resistance is located at 1.2650 (mid-point of the ascending channel). If GBP/USD rises above that level and starts using it as support, 1.2670 (Monday high) and 1.2700 (psychological level) could be targeted.

GBP/USD has been moving up and down in a tight range above 1.2600 early Wednesday following Tuesday’s indecisive action. April’s inflation report from the US could trigger a short-term reaction in the pair ahead of the Bank of England’s (BoE) policy announcements on Thursday.

Although the US Dollar Index extended its recovery amid risk aversion on Tuesday, GBP/USD managed to hold its ground. Investors seem to be reluctant to bet on Pound Sterling weakness on the possibility of a hawkish BoE surprise. HSBC noted recently that it see the risk of a “few” votes for 50 bps increase, based on recent UK data.

Having said that, inflation data from the US could trigger a straightforward market reaction and impact GBP/USD in the American session on Wednesday. The headline Consumer Price Index (CPI) in the US is forecast to rise 5% year-on-year in April, the same as in March. The Core CPI, which excludes volatile food and energy prices, is expected to increase 0.4% on a monthly basis.

Market participants remain fairly certain that the US Federal Reserve will pause its tightening cycle in June in the face of tightening financial conditions. A stronger than expected increase in the Core CPI in April could cause investors to reassess the Fed’s rate outlook and provide a boost to the US Dollar (USD) in the near term. On the flip side, a soft monthly core inflation reading should help GBP/USD gather bullish momentum.

Nevertheless, GBP/USD’s reaction might not be strong enough to provide a directional clue with the BOE’s rate decision looming.

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