The GBP/USD currency pair extended its bullish momentum on Wednesday during the North American session, as investors responded to the weaker-than-expected US Consumer Price Index (CPI) for May. The CPI print, which came in below consensus, raised expectations that the Federal Reserve (Fed) could initiate multiple rate cuts in 2025, enhancing demand for the British pound (GBP) against the US dollar (USD).
At the time of writing, the GBP/USD exchange rate trades at 1.3537, representing a 0.34% intraday gain. Get a detailed overview of this topic from the professionals at Servelius in this article.
US Inflation Undershoots Expectations
In a pivotal data release, the US CPI rose 2.4% year-on-year (YoY) in May, slightly above April’s 2.3% YoY but below the 2.5% consensus estimate. Meanwhile, core CPI, which strips out volatile categories such as food and energy, held steady at 2.8% YoY, underscoring a moderation in price pressures.
This disinflationary trend bolstered market sentiment, leading to increased speculation that the Fed may implement two rate cuts in 2025. Interest rate futures began pricing in a more dovish Fed policy outlook, prompting broad-based USD weakness across major currency pairs.
The subdued inflation print follows recent comments from Fed officials emphasizing a data-dependent approach to monetary policy. However, the ISM Manufacturing and Services PMIs reported elevated input costs, suggesting that producer inflation may remain sticky. As a result, all eyes are now on Thursday’s US Producer Price Index (PPI), which could either confirm or contradict the apparent easing in inflationary pressures.
UK Budget Adds Gilt Pressure Amid Dimming Fiscal Outlook
On the UK front, the announcement of a £2 trillion budget by Chancellor Rachel Reeves has further complicated the fiscal landscape. Reeves described the budget as a plan for “national renewal,” focusing heavily on healthcare, education, and infrastructure spending. While this fiscal stimulus may support economic growth, it has also raised concerns over the UK’s public finances.
The UK now holds one of the highest long-term bond yields among G7 nations, with 30-year Gilts reflecting growing investor anxiety about the sustainability of government debt. The expansionary fiscal stance could pressure the Bank of England (BoE) to keep interest rates elevated, especially if inflation expectations rise again.
However, economic growth forecasts for the UK remain tepid, and with disinflationary forces gaining traction globally, the BoE may need to balance fiscal expansion with monetary prudence. For now, the central bank is expected to maintain the current policy rate in next week’s meeting.
Technical Outlook: Cable Clears Key Resistance
From a technical analysis perspective, GBP/USD appears to have established a short-term bottom around the 1.3450 support zone. The pair has successfully broken above the 20-day Simple Moving Average (SMA) at 1.3515, which now serves as an initial support level for any potential pullbacks.
If bullish momentum persists and GBP/USD breaches the 1.3600 resistance, the next target will be the year-to-date high at 1.3616, followed by the psychological barrier at 1.3700. These levels are closely watched by technical traders, and a confirmed breakout could signal a continuation of the uptrend.
On the downside, initial support lies at the 1.3515 area, aligning with the 20-day SMA, followed by the 1.3450 horizontal level. A decisive break below this region could expose the May 29 low at 1.3412, suggesting that bearish pressure may resurface if USD strength returns or UK fiscal risks intensify.
Conclusion: Fed Dovish Hopes Drive GBP/USD Higher
The rally in GBP/USD underscores how closely tied the pair is to shifts in US inflation dynamics and rate expectations. With the May CPI undershooting forecasts, the market narrative now leans heavily toward at least two Fed rate cuts in 2025.
In contrast, the UK faces growing fiscal headwinds, which complicates the outlook for interest rates and sovereign debt markets. However, in the near term, Fed policy speculation remains the dominant driver.
Traders will need to watch for confirmation from the Producer Price Index and potential Fed commentary, as these could either reinforce or undermine the current GBP/USD bullish narrative. For now, Cable’s momentum remains intact, with the technical picture and macro narrative favoring further appreciation, provided key support levels hold and US economic data continues to soften.
