The Pound Sterling gains more ground as persistent inflation in UK services weighs on BoE rate cut bets

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The Pound Sterling (GBP) rises above the round-level resistance of 1.2700 on Wednesday after the UK’s Office for National Statistics (ONS) showed that price pressures eased as expected in May. The UK’s annual headline inflation returned to the central bank’s 2% target for the first time in more than three years from April’s reading of 2.3%. In the same period, the Core Consumer Price Index (CPI), which excludes volatile food and energy prices, decreased to 3.5% from the previous reading of 3.9%.

The monthly headline inflation grew steadily by 0.3% but below the estimates of 0.4%. The report also showed that the annual Producer Price Index (PPI) for core output grew significantly by 1.0% in May, compared to the previous month’s rise of 0.3%.

Despite a drop in the annual headline CPI to 2%, Bank of England (BoE) policymakers might not be comfortable with early rate cut discussions as the annual services inflation barely slowed. Inflation in the services sector grew by 5.7%, slightly lower than the previous release of 5.9% but higher than the 5.5% expectations and remains almost double what is necessary to contain price pressures.

The next trigger for the Pound Sterling will be the BoE’s monetary policy decision, to be announced on Thursday. It is widely anticipated that the BoE will keep the interest rate unchanged at 5.25%. Therefore, investors will focus on the vote split and any new hints on when the BoE will start cutting interest rates.

Technical Analysis: Pound Sterling recovers near the 20-day EMA

The Pound Sterling extends its recovery above 1.2700 with persistent UK services inflation data. The GBP/USD pair rises near the 20-day exponential moving average (EMA) at 1.2720, although the short-term trend remains uncertain. The 50-day EMA near 1.2670 is acting as a major support for Pound Sterling bulls.

Currently, the Pound holds the 61.8% Fibonacci retracement support (drawn from the March 8 high of 1.2900 to the April 22 low of 1.2300) at 1.2667.

The 14-period RSI falls back into the 40.00-60.00 range, indicating that the bullish momentum has moderated.