GBP/USD sticks to stronger UK CPI-led gains, modest USD strength caps the upside

The GBP/USD pair reverses an early European session dip to the 1.2400 mark and turns positive for the second successive day on Wednesday. Spot prices, however, retreat a few pips from a fresh weekly high touched in the last hour and currently trade near the mid-1.2400s, still up around 0.20% for the day.

The British Pound strengthens across the board following the release of stronger UK consumer inflation figures and turns out to be a key factor pushing the GBP/USD pair higher. In fact, the UK Office for National Statistics (ONS) reported that the headline UK CPI eased less than expected, to the 10.1% YoY rate in March from 10.4% in the previous month. Furthermore, the Core CPI, which excludes volatile food and energy items, held steady at 6.2% YoY during the reported month against expectations for a slide to 6.0%.

The stubbornly high inflation comes on the back of the stronger UK wage growth data on Tuesday and should keep pressure on the Bank of England (BoE) to raise interest rates further. In fact, the markets now see over a 90% chance of a 25-bps rate hike in May, which, in turn, is seen benefitting the Sterling Pound. That said, the emergence of some US Dollar (USD) buying is holding back traders from placing aggressive bullish bets around the GBP/USD pair and keeping a lid on any further gains, at least for the time being.

The messages from several Federal Reserve (Fed) policymakers have been very hawkish lately and support prospects for further tightening by the US central bank. This allows the US Treasury bond yields to prolong the recent upward trajectory and touch a fresh multi-week high, which, in turn, helps revive the USD demand. Apart from this, a generally weaker tone around the equity markets further seems to benefit the Greenback's relative safe-haven status and contributes to capping the upside for the GBP/USD pair.

In the absence of any relevant market-moving economic data from the US on Wednesday, investors will focus on the release of the Fed’s Beige Book, due later during the US session, for the central bank’s take on the state of the US economy. This, along with the US bond yields and the broader risk sentiment, will influence the USD and provide some impetus to the GBP/USD pair. Nevertheless, the aforementioned mixed fundamental backdrop warrants some caution before placing aggressive directional bets.

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