GBP/USD eyes UK inflation

The British pound has edged lower on Tuesday. GBP/USD is trading at 1.2683 in the European session at the time of writing, down 0.16% on the day. There are no UK events on Tuesday, while the US releases retail sales. On Wednesday, we’ll get a look at UK inflation for May.

US Retail Sales expected to post small gain

US retail sales were flat in April but are expected to improve to 0.2% m/m in May. Yearly, retail sales are projected to dip to 2.8%, compared to 3.0% in April.

The Federal Reserve will be keeping a close eye on today’s retail sales data, hoping that any improvement in May retail sales is mild, as a weakening economy will support cutting interest rates.

The Fed has done a good job slashing inflation, although the final sprint to achieving the 2% target is proving to be a tough challenge. Fed policy makers are likely to go ahead with an initial rate cut even if inflation remains above target, so long as they are confident that inflation will continue to fall.

The markets have priced in a quarter-point cut in September at 60%, according to the CME’s FedWatch tool. That is up from 53% a week ago, but indicates that there is a strong chance that the Fed won’t change its “higher for longer” stance until November or December.

UK inflation expected to fall to 2%

In the UK, inflation is expected to fall to 2% in May, down from 2.3% in April. This would mean inflation has dropped to the Bank of England’s 2% target for the first time since April 2021. Unfortunately for the government, a positive inflation report will not translate into a rate cut at Thursday’s meeting, since there is an election on July 4th and the BoE does not want to be viewed as meddling in the election campaign. As well, services inflation came in at 6% in April, and that has to drop before the BoE will press the rate-cut trigger. The markets have priced in an initial rate cut in August.

GBP/USD technical

• GBP/USD faces resistance at 1.2734 and 1.2811.

• 1.2608 and 1.2531 are the next support lines.