GBP/USD recovery stalls above 1.3450 with all eyes on the Fed

The Pound loses steam with the US Dollar steady ahead of the Fed.
UK CPI figures reveal steady inflationary pressures in May.
The Fed statement and the economic and interest rate projections are likely to increase USD volatility later today.

Guillermo Alcala FXStreet

British Pound’s recovery attempts from Tuesday’s lows near 1.3400 have stalled about 50 pips higher on Wednesday’s European session. Investors are wary of placing US Dollar's directional bets ahead of the ªFederal Reserve’s monetary policy decision.

Earlier today, the Pound reacted with a moderately bullish tone to the release of May’s Consumer Prices Index figures, which revealed that rising food prices have offset the decline in transport costs, keeping the overall inflation fairly steady.

Monthly inflation eased to 0.2% in May from 1.2% in April, while the year-on-year rate eased to 3.4% from 3.5%, in line with the market’s expectations. Core inflation eased to 3.5% from 3.8%, beyond the 3.6% rate forecasted by the analysts.

Geopolitical tensions are gripping markets

Market sentiment remains sour, with investors increasingly wary that the Israel-Iran war might escalate with the involvement of the US. Trump’s threats to Tehran have been responded to by the Iranian ambassador to the US, driving the situation to the boiling point and hammering investors’ appetite for risk.

In this context, the focus turns to the US Federal Reserve, which is widely expected to leave interest rates on hold but will publish new economic and interest rate projections that might help investors to assess the bank’s rate-cutting calendar.

Previous economic projections have downgraded the GDP growth expectations for 2025 to 1.7% from 2.1% and PCE inflation to 2.5/ from 2.7%. March’s summary also projected between 25 and 50 bps further cuts for the rext of the year. Any changes to these figures are likely to have a significant impact on the USD.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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