Pound Sterling hits three-year high against US Dollar on hot UK CPI data

• The Pound Sterling gains against the US Dollar on stronger-than-expected UK CPI data.
• The UK Service CPI accelerated to 5.4% in April from 4.7% in March.
• Moody’s downgrade to the US credit keeps the US Dollar on the backfoot.

The Pound Sterling (GBP) trades close to a fresh three-year high around 1.3470 against the US Dollar (USD) during North trading hours on Wednesday, posted earlier in the day. The GBP/USD pair advances on the release of the hotter-than-expected United Kingdom (UK) Consumer Price Index (CPI) data for April.

As measured by the CPI, the UK headline inflation rose at a robust pace of 3.5% on year, compared to estimates of 3.3% and the March reading of 2.6%. This is the highest level seen since November 2023. In the same period, the core CPI – which excludes volatile components of food, energy, alcohol, and tobacco – grew by 3.8%, faster than expectations of 3.6% and the prior release of 3.4%. Month-on-month headline inflation rose strongly by 1.2%, compared to estimates of 1.1% and the former reading of 0.3%.

The UK Office for National Statistics (ONS) reported a notable increase in prices of housing and household services, transportation, and recreation and culture, which led to a sharp surge in inflationary pressures, a major trigger that will discourage the Bank of England (BoE) from supporting an expansionary monetary policy stance further.

Inflation in the services sector, which is closely tracked by BoE officials, accelerated to 5.4% from 4.7% in March. Ballooning inflationary pressures are expected to force BoE policymakers to remove their “gradual and cautious” monetary expansion guidance from their next policy announcement, which is scheduled in June, and will pressure traders to pare dovish bets.

Meanwhile, Chancellor of the Exchequer Rachel Reeves showed disappointment on hot UK CPI data. “I am disappointed with the inflation figures,” Reeves said.

On Tuesday, BoE Chief Economist Huw Pill warned of caution in interest rate cuts due to “potential inflationary impact of structural changes in price and wage setting behaviour, following the experience of prolonged, well above-target inflation in recent years”, Bloomberg reported.

Daily digest market movers: Pound Sterling gains against US Dollar

• The Pound Sterling trades firmly against the US Dollar on Wednesday due to a substantial weakness in the Greenback on the back of Moody’s downgrade to the United States (US) Sovereign Credit rating, Federal Reserve’s (Fed) concerns over economic outlook in the wake of new economic policies, and US President Donald Trump failing to convince lawmakers to back tax bill.
• The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slumps to near 99.45, the lowest level seen in two weeks.
• Moody’s one-notch downgrade in the US long-term issuer rating to Aa1 from Aaa, which came on the back of mounting fiscal imbalances and an increase in interest obligations for the US administration due to a $36 trillion debt pile, continues to batter the US Dollar. Additionally, fears of a further increment in the country’s debt burden, with Trump’s new tax bill aiming to increase the administration’s liability by $3 trillion-$5 trillion, are also dampening the credibility of the US Dollar.
• On Tuesday, Republican lawmakers dissented to back the new tax bill, citing that it aims to raise limits on deductions for state and local tax payments, according to a Republican Representative Mike Lawler, Reuters reported. Meanwhile, Democrats stated that the bill would lead to cracks in social programs and would favor the wealthy. These comments from Democrats appeared to have come on the back of tightening Medicaid norms in the tax bill.
• Meanwhile, Fed officials have warned of stagflation due to the fallout of new economic policies by US President Trump. Policymakers have argued in favor of maintaining interest rates at their current levels as tariffs could lead to a sharp increase in inflation.

Technical Analysis: Pound Sterling holds above 1.3400

The Pound Sterling surrenders some of its intraday gains against the US Dollar in Wednesday's European session, but is still holding the key support of 1.3400. Earlier in the day, the pair climbed to near 1.3470, the highest level seen in over three years. The overall trend of the GBP/USD pair was already bullish as all short-to-long-term Exponential Moving Averages (EMAs) are sloping higher.

The 14-day Relative Strength Index (RSI) breaks above 60.00, suggesting a fresh bullish momentum if the RSI holds above that level.

On the upside, the 13 January 2022 high of 1.3750 will be a key hurdle for the pair. Looking down, the 20-day EMA near 1.3300 will act as a major support area.