GBP/USD firms to 1.3384 as traders brace for hotter US CPI data

The pound rose 0.31% to $1.3384 after touching a session low near $1.3330, with the dollar index flat at 99.93 as markets priced a 70% probability of a Fed rate increase by December.

BoE official Megan Greene said last week she sees a case for hiking rates as inflationary pressures broaden across the economy because of the Iran war, according to prepared remarks. The Bank of England is expected to tighten by at least 45 basis points, Prime Terminal data show.

The US CPI report due Wednesday is forecast to show headline inflation accelerated to 4.2% year over year in May from 3.8% in April, with core CPI rising to 2.9% from 2.8%. Money markets are pricing 23 basis points of rate increases by the Fed toward year-end. Gold traded near $4,330, its lowest since late March, as higher real yields reduced the appeal of non-yielding assets. Bitcoin fell to $62,747 from a May peak above $82,000.

A hotter-than-expected print would reinforce the hawkish repricing triggered by last week's payrolls report, which showed 172,000 jobs added versus the 85,000 consensus. That would strengthen the dollar and push GBP/USD toward the 1.3159 support level. A cooler reading would revive rate-cut expectations and potentially drive cable back above the 1.3404 resistance zone.

Rate differentials widen as central banks diverge

The pound's resilience reflects growing expectations that the BoE will keep pace with the Fed on tightening. UK GDP data due this week will provide the next test of whether the economy can withstand higher rates. The US dollar index held near the flatline at 99.93 after softer ADP hiring data showed the four-week average of private payrolls dipped to 29,000 from 37,500.

The divergence in rate expectations has widened the GBP-USD yield differential, with the 10-year US Treasury yield holding near 4.55% while UK gilt yields adjusted higher on BoE tightening bets. This dynamic has provided a floor for cable even as the dollar strengthened broadly against other major currencies. The euro slipped 0.15% against the pound, while the yen weakened 0.36% as the rate differential between US and Japanese government bonds continued to favor dollar-denominated assets.

Fed Chair Kevin Warsh, sworn in on May 22, has committed to tighter inflation discipline, according to his confirmation testimony. Cleveland Fed President Beth Hammack reinforced that stance, warning the central bank may need to act soon to bring inflation back to target. The hawkish pivot marks a sharp reversal from the rate-cut expectations that dominated markets in the first quarter.

Technical levels in focus ahead of CPI

GBP/USD remains below its clustered simple moving average near 1.3459 and the broken uptrend line at 1.3404, which now act as overhead supply. The relative strength index at 44 leans modestly bearish, suggesting lingering downside pressure. On the downside, structural support sits near 1.3159, the origin of the uptrend, leaving the pair vulnerable to further losses if sellers regain control.

The last time cable traded at these levels ahead of a major data release was in March, when a hotter-than-expected CPI print pushed the pair below 1.3300 within 48 hours. A repeat of that pattern would put the 1.3159 support zone in play, while a break above 1.3459 would signal a shift in near-term momentum. The 1.3575 level, which marks the interim trigger of the broader descending trend line from 1.3869, represents the next major resistance if buyers regain control.

This article is for informational purposes only and does not constitute investment advice.