GBP/USD: Bulls capped below 23.6% retracement

• GBP/USD is currently trading at 1.2688, -0.28% on the session.
• US data, the Fed, BoE and Brexit all playing their part in the mix. 

GBP/USD has been good two-way business again on Wednesday, travelling within a range of between 1.2681 and 1.2758, albeit a basketcase for the institutions given the continuous conflicting Brexit noise, if geopolitics elsewhere were not painful enough these days for traders.

On good old fashioned economic drivers, however,  U.S. Headline inflation rose 0.1% month-on-month in May, leaving the annual rate of CPI at 1.8% year-on-year, down from 1.9% in April. Core inflation was softer, missing the consensus 0.2% month on month prediction by a tenth of a percentage point, thus leaving the annual rate of core inflation at 2% - the slowest rate since February 2018. However, key services components suggest underlying prices remain firm. "We believe details in the report should bring relief to Fed officials as some of the factors mentioned as transitory appear to be less of a drag in prices," analysts at TD Securities argued, citing airfares, apparel and some of the details in the May PPI report which suggest to them that core PCE inflation should continue to move gradually closer to the 2% target.

U.S. retail sales and the Fed coming up

Next up, ahead of next week's FOMC, are US retail sales. The dollar needs a solid report here and considering the driving season, auto sales could be the backbone of a positive headline. Nevertheless, the FOMC will be more concerned over possible escalations on the trade front, and as far as FX price action goes ahead of next week's showdown, unless there is a significant catalyst regarding a possible resolution or escalation on the trade front, we are likely to remain in familiar ranges - for if anything was to really move the markets, it was today's CPI data which didn't exactly break any glass anywhere. On the Fed, next week will likely see the FOMC signalling an easing bias, which is already priced into the market. The “dot” diagram, will be scrutinised which currently has a rate 'hike' priced in for 2020.

Brexit headlines back in vogue

Meanwhile, Brexit headlines are making their way back through with the run-up to the leadership contest of the Conservative party. Boris Johnson launched his leadership bid this week with a pledge of Oct 31 Brexit and promises conservatives no more Brexit delays. He said today, that he is "not aiming for a no-deal outcome" for Brexit at the launch of his campaign for the Tory leadership. This, indeed, gave a boost to sterling. Meanwhile, Labour's cross-party motion aimed at stopping a no-deal Brexit being pushed through by a future prime minister was rejected by MPs. The Commons opposed the move by 309 votes to 298 - GBP reverses. 

BoE underscores a hawkish tone

However, above all else, the most significant factor for the pound is the course in U.K. (and U.S.) interest rates.  The Bank of England, BoE, will probably need to raise interest rates sooner than financial markets expect, which was a statement made by policymaker Michael Saunders on Monday, which followed an unexpectedly hawkish message from the central bank’s chief economist on Saturday. Saunders said that the BoE would not necessarily wait until all Brexit uncertainties were resolved before raising interest rates again. In the same vein, it was just last month when the Governor of the Old Lady, Mark Carney, highlighted that inflation was likely to overshoot the BoE’s target over the coming years if it did not raise rates faster than was priced into markets.

GBP/USD levels

Analyst at Commerzbank explained that GBP/USD is struggling to overcome the 23.6% retracement at 1.2753 and is consolidating very near term just below here:

"The market remains upside corrective for now. It will need to regain this on a closing basis in order to alleviate immediate downside pressure and avert further losses to the 1.2444 December 2018 low. We are looking for the correction higher to extend to the 38.2% retracement at 1.2873, where we suspect it will stall. Minor resistance lies at the 1.2772 February low ahead of the 1.2865 April low."