Pound Sterling holds gains on improved market sentiment, UK inflation in focus

• The Pound Sterling holds strength near 1.2700 as investors turn risk-averse on firm Fed rate-cut hopes.
• April’s UK headline inflation is expected to return to near 2%.
• This week, investors will focus on the UK inflation for April and the FOMC minutes.

The Pound Sterling (GBP) trades close to an almost two-month high around 1.2700 in Monday’s European session. The GBP/USD pair strengthens as the US Dollar (USD) is on the back foot as financial markets remain confident that the Federal Reserve (Fed) will start lowering interest rates from the September meeting. 

Investor confidence in Fed rate cuts has strengthened due to a decline in the United States Consumer Price Index (CPI) data and easing labor market conditions as suggested by recent Employment and Initial Jobless Claims data. 

In spite of unsupportive economic indicators, Fed policymakers remain leaning towards a restrictive interest rate stance as a one-time decline in inflation is insufficient to build confidence that price pressures will sustainably return to the desired rate of 2%. Going forward, investors will focus on the Federal Open Market Committee (FOMC) minutes, which will be published on Wednesday. The FOMC minutes are expected to show that policymakers emphasized keeping interest rates restrictive for a longer period.

Daily digest market movers: Pound Sterling remains firm while US Dollar is on the back foot

• The Pound Sterling exhibits strength near the round-level resistance of 1.2700 against the US Dollar. The GBP/USD pair remains upbeat as the appeal for risk-perceived assets has improved amid firm speculation that the Federal Reserve will start reducing interest rates from the September meeting. S&P 500 futures have posted decent gains in the European session.
• This week, the strength of the Pound Sterling will be tested on the grounds of the United Kingdom (UK) inflation data for April, which will be published on Wednesday. The UK Office for National Statistics (ONS) is expected to show that annual headline CPI declined to 2.1% in April from the prior reading of 3.2%. The core CPI, which excludes volatile items such as food and energy prices, is estimated to have softened to 3.7% in April from 4.2% a motnh earlier.
• The expected decline in inflationary pressures will boost expectations of rate cuts by the Bank of England (BoE). Investors expect that the BoE will start reducing interest rates from the June meeting. Market speculation for ECB rate cuts in June has strengthened as BoE Deputy Governor Ben Broadbent sees rate cuts likely in the summer. Broadbent added that rates will be less restrictive at some point.
• The scenario would be unfavorable for the Pound Sterling as policymakers will cut interest rates for the first time since March 2020. Historically, higher interest rates by the nation’s central bank reduce liquidity inflows into the economy, which strengthens the currency’s appeal.
• Before the inflation data is released, investors will focus on the commentary from BoE Governor Andrew Bailey on the interest rate outlook, which is scheduled for Tuesday.